The global credit crunch for the rest of us.

Panic has been the prevalent sentiment on the world’s financial stage the last few month’s. Bankers have made booboos when estimating the amount of risk they run when loaning out money. Off course bankers are people too and just as bend on making a good sale as any second hand car dealer. They just earn more money and have bigger bonuses, which makes their motivation on making sales even stronger.

One of the great things about the US is that anyone can achieve their “American Dream”. Having your own house is considered a right, just like bearing your own arms. If you can’t pay for your property, no problem! The banks were always there to help you with the necessary cash at low interest, even if you weren’t sure you could pay the mortgage after Uncle Sam, Wal-Mart and Texaco had taken their cut. Millions of mortgages were sold to people who could barely pay their daily necessities, let alone an over the top mortgage. The banks weren’t too worried. Housing prices were always going up because ever one was buying. If Billy-Bob couldn’t pay anymore, he and his family could report to the nearest shelter, the bank would sell his property and still get their money, right?

Even the risk itself was a way for banks to make money. They could sell the mortgage backed debt or put them in collateralized debt obligations or CDOs. This way the liability could be kept off the balance sheet of the bank and even become an asset. Mix the mortgage backed debt with some other types of debt and presto! , a new product was born to sell to hedge funds, insurance companies and investment trusts and bring in lots of dinero. The commission alone was enough for investment bankers to finance another Lambo or a house in Aspen. Some investment companies even came up with CDOs backed by other CDOs, inventively named CDO squared. A whole new industry in trading other peoples debt sprang up and all was well in the great scheme pyramid

Billy-Bob in the meantime had great problems coming up with the cash for his mortgage every month. When finally the day came he didn’t pay, the bank told him they had no choice, put him and his family on the street and put his house up for sale. The problem was that it wasn’t just Billy-Bob that had troubles. His neighbors could soon be found in the same shelter as well and soon thousands of houses were up for sale. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure, up 79% from 2006

The problem with a great invention like the free market is that the price of everything is determined by the amount of things that are for sale versus the amount of people that want to buy those things. In the case of Billy-Bobs house, the amount of buyers was virtually zero. So the bankers began to worry because if no-one wanted Billy’s house for a decent price, the mortgage became worth a lot less then they had estimated before. In fact, the value of Billy-Bobs mortgage became virtually zero as well. The value of mortgage backed CDOs is as good as the value of the collateral behind it. Guess what? Suddenly the CDOs, Squared CDOs, quadrupled CDOs and so on were not so hot after all.

The whole structure, built like a domino row on top of a house of cards began to topple. Bear Stearns was the first to have to close down two hedge funds that primarily invested in sub prime, mortgage backed securities. On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, while negotiating with other banks to loan money against collateral to it’s other fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. Merrill Lynch seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. Millions of dollars evaporated overnight and Bear Stearns, who came to the funds rescue, finally had to foreclose the funds that once were worth billions.

In the meantime all was not so well anymore in the great scheme pyramid. Most US and a lot of European banks had invested heavily in the CDO pyramid scheme. Asian banks were a lot less exposed but since the global financial world isn’t defined by boundaries even they would be affected.

The blood of the world’s economies is pure cold cash. As long as this cash is liquid, can be spent like water, it can be used to make more cash. Companies lend money from banks, for instance to invest in new factories. Banks lend this money from other banks if they don’t have enough cash in their vaults. They can also lend money from the government but that’s bound by strict rules. When the sub-prime backed CDO pyramid started to collapse, the banks suddenly weren’t so eager to loan out money to each other or to businesses that wanted to expand. The banks’ credit portfolios, lists of expected revenue from businesses and other banks that owed money suddenly became a whole lot less valuable and a lot more risky. If Billy-Bob didn’t pay what about other companies, credit card holders and (shudder) car owners?

Like I said before, the price of everything in a free market is decided by the amount of sellers vs the amount of buyers. In this case the price of loaning money went up because the amount of eager sellers decreased dramatically vs the amount of eager buyers. The effect on the economy is still going on. Companies can’t expand because of lack of (cheap) funds. They’ll have to fire people who then don’t have money to buy stuff. Other companies can’t sell their stuff because there’s nobody with enough money to buy! Prices go down, profits slump and after a while depression sets in.

So far the only visible casualties have been Bear Stearns, Northern Rock and a few hedge funds. Dozens of banks world wide have suffered heavy losses but will survive. It’s now a matter of keeping trust. In my opinion, the world will look at Asia as the next leading economic powerhouse. It will be very interesting to see what the US government will do to make sure this won’t happen again. If I can make a small prediction, it will be something in the line of stricter regulatory rules, Basel III and tighter reigns for financial institutions. This may help in a small way but will be at best a remedy for the symptoms, not a cure for the disease. Prudent spending instead of unbridled consumerism would be a much better cure. If Americans can’t learn that a shopping spree is okay as long as you can pay in cash instead of pulling the plastic and that the extra value of your house shouldn’t be spent on a new big screen TV, the next bubble is already around the corner.

The risk of growth in China

Working in Singapore for an international bank, it's easy to see the shifting of Asian economies from US domination towards China. The size of the Chinese internal market makes it hard to keep up with growing demand, as prosperity increases. The weakening dollar acts as an extra incentive to divert export from the US to China (and to a lesser extent India). The biggest issue with the Chinese economy is the lack of transparency and regulatory oversight. This could create bubbles that will create shockwaves of Enronian proportions when they collapse. Already the housing prices in cities like Shenzen and Shanghai are on the same level as Hong Kong and Singapore. Rising consumerism puts pressure on the lower-middle class to keep up and banks are not saying no. This could create whole new set of Asian sub prime- and credit crunches. Chinese do not have a tradition of living on borrowed money, like most Americans do and once used to easy credit, might lack the discipline to only buy on credit when absolutely neccesary. Rampant corruption and 'guanxi' (http://en.wikipedia.org/wiki/Guanxi) make it hard for foreign investors to invest in the country. Rising wages will also make investing less attractive in the long run. The best way for other Asian nations to become less dependend on Chinese export is to cooperate and develop their own economies, much the same way the EU are doing. The Asian Pacific Rim countries sshould look at non-Pacific regions as well. ASEAN is a good step towards this goal but there is still a lot of distrust and (again) corruption. The difference in size and development of countries like Singapore, Malaysia and Thailand compared to their poorer brothers Vietnam, Cambodia e.a. make integration a difficult task not to mention that in Birma there's no economic freedom at all.

China and its neighbours

China’s growth as a regional economic powerhouse has been rapid. However, the historic ties between the mainland Chinese manufacturers and the local Chinese traders go back for centuries. Already in the 15th century the “Straits Chinese” or Peranakan (土生華人) established a trading route between China and Malacca in Malaysia[1]. From there the influence of Chinese traders expanded to most of the South East Asian region, eventually taking over major parts of the local economies. In Indonesia, despite severe discrimination, 70-80% of the country’s economy is influenced if not owned by Chinese. Singapore has a population of 80% of Chinese origin, The Philippines, Vietnam, and most other SE Asian nations have an influential and economically powerful Chinese minority. It wasn’t until the economic reforms initiated by Deng Xiaoping in the late 70’s that China began to directly influence SE Asian - and to a lesser extend - Australian economies.
South East Asia countries have always looked at their big brother China with ambivalence. On the one hand China imports raw materials and agricultural products from countries like Burma (Myanmar), Indonesia and Thailand. On the other it exports silk, rice and in modern days electronics and heavy machinery to feed the booming Asian economies. It has not been until recently that the domestic market in China has developed to a point that domestic supply isn’t sufficient anymore. To complement their manufacturing capabilities China is now looking to develop services for their local financial, IT and administrative needs. China's software outsourcing revenue will more than double, to $5 billion, by 2005. Gartner Inc. predicts that by 2007 China will pull in $27 billion for IT services, including call centers and back-office work, matching India[2].
One of the major issues for China will be to keep up with demand. Local talent is scarce and mostly focused on manufacturing, the backbone of China’s booming growth. Local wages continue to rise making local Chinese companies increasingly look to opportunities abroad. One of the big 4 banks in China has established a call center in The Philippines where customers can inquire in Mandarin or Cantonese. Chinese clothing manufacturers are already looking to establish a presence closer to the US market by outsourcing to Mexico. Original brand manufacturing (OBM) is gaining penetration in China. Big electronics chain stores—Gome and Suning, for example—outsource both design and manufacturing of consumer electronics to top Chinese manufacturers. Assembly no longer takes place in China but has been off shored to Indonesia, where local wages are lower than even Chinese can accept.
The growing dependence of APAC economies on the Chinese domestic market means that if this market stops growing there will be no substitute unless these countries manage to get their own internal markets growing.

At home, China faces even bigger issues. To keep even with the population growth and the number of new workers entering the workforce each year, the Chinese economy has to grow by 7% a year. If it doesn’t, the resulting poverty will end domestic demand before it takes off. The resulting gap between the rich coastline cities and the poor inland provinces can cause major political and social disturbances, eventually ripping the country apart. When this happens, the end of China as the manufacturer of the world will be at hand. Despite the appearance, China is not one unified country but a collection of different peoples with as varied a background as any European country. Since the Chinese emperors and their communist successors, the union of China has been assured by central rule alone. If the Chinese government fails to hold the country together the resulting chaos will cause foreign companies to withdraw their assets which in turn can lead to China withdrawing their foreign investments, which are substantial. For instance, almost half of US State Bonds are owned by China, which recycles the US dollars it gets back into the US economy financing the US trade deficit. The result will be a collapse of the US economy which in a way has been financed by China all along[3].
In the APAC region, the result of a disappearing or severely shrinking Chinese market will be even more severe. In the scenario described above, the US market will be heavily affected by the collapse of the Chinese economy. The resulting downturn of the US market combined with the halt in Chinese investment means there is no way to fuel the domestic economy anymore.
The best way local governments can avert the worst effects of the China-US scenario is to create an independent, unified internal market. ASEAN, the Asian economic organization, is the first step towards this goal. There is still a long way to go though. The mistrust between the member states, combined with blatant corruption and local political issues make a unified market like the European Union has an option that is far away. Indonesia so far has failed to fully leverage its potential to create critical mass for its internal market. Like in The Philippines, there are issues with local corruption as well as a possible disruptive terrorist threat[4]. Inconsistency in foreign relation policies is a possible impediment for economic unity as well. For instance, Singapore was dependent on Indonesia for the supply of sand to support the real estate boom the small country is currently enjoying. Indonesia in an attempt to leverage this dependency to solve some long standing but unrelated political issues suddenly banned the export of sand to Singapore[5]. This halted Singaporean construction almost immediately causing real estate prices to rocket. Investing in local infrastructure, schooling and a fair and open wage policy is something all local governments should strive for. In ASEAN member state Myanmar, the very basics of democracy have been suppressed by a dictatorial government. Still, Myanmar ruling General Tan Shwe could freely travel to Singapore to receive treatment for an intestinal tumor[6].
Now China has become a member of the WTO it faces similar issues. Despite the name, The WTO is basically a US dominated body which brings the main issues of the US-Chino relationship to light. One of the issues is China’s record of human rights abuse. Despite the fact that the US presently is known one of the worst human rights abusers in the world China is constantly reminded that as a WTO member it should put human rights high on the agenda. In itself there’s nothing wrong with that as long as the criticism can go both ways.
A major issue is China’s shallow integration into the world economy. Its protective stance is not only limited to trade tariffs but also affects information services. Later this year the US and the EU will take China to the WTO over the fact that financial news companies are not allowed to interact directly with their customers. The companies are not allowed to have their own local branch but must act through the China Economic Information Service. The CEIS has its own vested interests as a news provider[7].
Most political issues China faces have to do with its obsessive control over its own population. One major problem however is its policy on Intellectual Property rights. The US film, music industry claim losses of billions of dollars because of pirated movies and CD’s. Branded clothing designers like Louis Vuitton don’t mind using Chinese sweatshops to add to their bottom line but resent the fact that the $5 knock offs available at Beijing’s local markets are virtually indistinguishable from the real thing. As long as a genuine copy of Microsoft Windows Vista costs the equivalent of 6 months of wage, this issue will not go away.

Mote Aquaculture Park - Sturgeon Project

Abstract

This paper is an analysis of a case study entitled “Mote Aquaculture Park – Sturgeon Project” (Ritchy & Michaels, 2005). The case study gave a detailed overview of the creation of an aquaculture fish farm for the production of sturgeon meat and caviar. It describes the setup of the plant and its administrative facilities, a history of domestic and international seafood production and a short description of the level of demand and supply of seafood in the US. This analysis will address economic, political-legal, technological and socio-cultural challenges and opportunities. Using Porter’s trade theory of National Competitive Advantage, the salient issues associated with cultivated seafood production are identified. Finally an advice on follow up actions based on this analysis will be given.


Caviar is to dining what a sable coat is to a girl in evening dress.
~ Ludwig Bemelmans


Economic opportunities of cultivated sturgeon production.

Few types of food bring up images of affluence and decadence like the roe of the sturgeon, otherwise known as caviar. The word caviar originates from the Turkish khavyar, first appearing in English print in 1591. Once only served to royalty it was degraded to canteen food for construction workers during the early nineteenth century. As recently as the 1870s, a half-ton white sturgeon was selling for twenty-five cents at wholesale fish markets At that time the American rivers were so abundant with sturgeons that prices for domestic caviar dropped to near zero until the German immigrant Henry Schacht decided to export the eggs to Europe where it was sold as coveted “Russian caviar” which was considered a premium, fetching prices of more than a dollar per pound.

Serving and eating caviar has always been seen as a sign of affluence. To celebrate the birth of her son to the Grand Duke Paul, Catherine the Great of Russia gave a banquet of such magnificent proportions that the English Ambassador to the Russian Court made up a detailed report of the affair, saying that there were "... jewels and caviar..." on the banquet table to the amount of more than two million sterling. With supply dwindling and demand growing, the price of caviar has grown so high that cultivation of sturgeons becomes economically viable. It stands to reason that with a carefully maintained image the demand for caviar isn’t anywhere near its peak. At this moment most caviar is consumed in Russia and surrounding countries, Europe and Japan.

The economic rise of countries like India and traditionally fish loving China has resulted in an equal increase of the number of affluent and super-affluent individuals. These “new rich” like to show their wealth by driving expensive cars, wearing expensive clothes and eating expensive food. For instance, the consumption of abalone during Chinese New Year is ever increasing even though this shellfish is considered one of the most expensive. With careful marketing, caviar could be considered as an even larger display of wealth especially since it lends itself perfectly to Chinese versions of dishes like the Russian blini. Though less glamorous, sturgeon meat is considered a good source of amino acids and cultivation efforts for that purpose are well underway in China.

The status sensitive Chinese are well on their way to become the largest market for designer brands like Louis Vuitton while India’s largest conglomerate Tata has recently bought the Jaguar car brand from Ford, confirming India’s rise in the world economic ranks. Indian chefs are now serving caviar to their customers. "Earlier, mostly expats and hotels bought caviar; now people order it even for birthday parties. Demand has skyrocketed." Sripal Khanna of `All Things Nice,' an up market south Delhi grocery admits. With the continuing increase in economic wealth, the demand for luxury goods like caviar will keep rising as well.

Political/legal opportunities.

The overfishing of sturgeons to the point of extinction has caused concern, not only in the environmental protection community but with governments and regulators as well. The precarious position of the sturgeon was recognized in 1997 by the Standing Committee of CITES – the Convention on International Trade in Endangered Species of Wild Fauna and Flora – at their annual meeting. They decided to regulate the international trade in sturgeon, and included all 23 species of the Acipenseriformes (sturgeon and its cousin, the paddlefish) in Appendix II, the list of species “not necessarily threatened with extinction, but in which trade must be controlled in order to avoid utilization incompatible with their survival.” In 2000, the Committee recommended “the introduction of a universal system for caviar labeling to help identify legal caviar in trade” and curb poaching and illegal caviar trafficking. although until 1966, any fish roe that could be colored black could be called caviar. This ended when the Food and Drug Administration defined the product, and established rules for its labeling.

“The name ‘caviar’ unqualified may be applied only to the eggs of the sturgeon prepared by a special process. Fish roe prepared from the eggs of other varieties of fish and prepared by the special process for caviar must be labeled to show the name of the fish from which they are prepared, for example ‘whitefish caviar.’ All words in the name should be in type of substantially the same size and prominence. If the product contains an artificial color, it must be an approved color and its presence must be stated on the label conspicuously. No artificial color should be used which makes the product appear to be better or of greater value than it is. The label should bear a statement of ingredients listed by their common or usual names in descending order of predominance because no standard of identity has been established for any form of caviar.”

Curiously, caviar has always played a marked role on the international political stage. During the Cold War it was considered “unpatriotic” to serve Russian caviar at US state dinners. After the fall of the Iron Curtain, a new enemy was found in Iran, which plans to produce 50 tons per year by 2012. As tensions between the US and Iran rise, the export in Iranian caviar to the US, or other countries when paid in dollars, is banned even though “Cavear Emptor” an organization that creates awareness of the plight of the wild sturgeon, considers Iranian cultivated caviar production an example of sustainable farming.

For domestic aquaculture companies, the political and legal issues could be an advantage. Sustainable cultivation of sturgeons will change the image of caviar production being the cause of the extinction of sturgeons. Political tensions may cause domestic and foreign consumers to switch to US produced caviar. Finally trade restrictions can severely hinder the export of caviar from countries like Iran causing demand to switch to caviar produced in non restricted countries.

Technological opportunities .

The near extinction of wild sturgeons has led to an ever dwindling supply of its roe. Sturgeons are not the easiest kind of fish to cultivate and the quality of American cultivated caviar has never reached the level of Iranian Osetra or Russian Beluga. Technological breakthroughs in the use of sustainable aquaculture methods will give Mote’s sturgeon project an advantage. Traditional aquaculture as used by Iranian companies in the Caspian Sea use a combination of natural and planned production. Mote will use a completely controlled self contained system that allows for less water consumption and more importantly better quality control. Global warming is causing weather patterns to behave unpredictably and fish farms out at sea are much more vulnerable then aquaculture production plants on dry land. Cross breeding can produce sturdier sturgeons with higher egg production and better meat.

Socio cultural opportunities.

The new target markets India and China are steeped in tradition when it comes to food. Certain kinds of food are only eaten at certain occasions, other are eaten because of their wealth bringing qualities (like the abalone (bao yu, 鮑魚)). The medicinal qualities of caviar are not scientifically proven but there are hand creams containing the protein rich eggs and the beneficial properties of fish eggs in general have been studied by practitioners of Traditional Chinese Medicine (TCM). Care must be taken not to market caviar as a decadent Western food but as a traditional sign of wealth.

Economic threats of cultivated sturgeon production.

One of the biggest issues of producing cultivated caviar is that of image damage. The consumption of caviar is always linked to its price and its (perceived) rarity. Like diamonds and fur, caviar is seen as something refined and sophisticated. Both diamonds and fur have sustained damage to their image. Fur production will always have the stigma of dead and mistreated animals even when these animals are bred in sustainable ways. Diamond producers are heavily campaigning to retain the glamorous image of their product after it became known that civil wars in Africa are financed by so called “blood diamonds”. Diamond prices are strictly controlled by a system of site holders, diamond wholesalers who get their cue from one of three major mine holders, the largest of which is De Beers. Overproduction of caviar will influence the price which will in turn affect the exclusive image of the product.

The state of the US economy increases the risk of a worldwide economic depression. When this happens the demand for luxury items like caviar will be hit first. Decrease in demand will cause prices to drop with again an added risk of loosing the exclusive image of caviar.


Political/legal threats.

As described earlier, caviar production and -sales have become the subject of regulation. Although domestic production will guarantee a stable political environment, regulatory and liability risks are higher. Export may expose the company to trade barriers as countries move to protect their own domestic production. Caviar, once packed is a relatively simple product with few additives (although some countries use borax which is frowned upon by the FDA). Political threats could come from countries taking a reciprocative stance towards US trade barriers or boycotts.

Technological threats.

The use of advanced technology to cultivate sturgeons brings a dependence on that same technology. Patents ensure that this technology will not be used by competitors. In fact the cross breeding of sturgeons might result in a sub-species that can be patented itself, creating a competitive advantage. Sustainability and protection of the sturgeon as a species is one of the main concerns. Because the sturgeon’s habitat is self contained any contamination can have severe effects on the population. Contamination or a breakdown of the circulation system are also risks that have to be addressed.

Socio-cultural threats.

The image of caviar as a decadent product can work against it from a cultural point of view. Even common products like Pepsi Cola are seen as an attempt to dominate or even supplant native culture. If domestically produced caviar is seen as an exclusive American product there might be resistance in Middle Eastern and other Muslim dominated countries.


Competitive advantage.

According to the theory of National Competitive Advantage, a nation attains a competitive advantage if its firms are competitive. Firms become competitive through innovation. Innovation can include technical improvements to the product or to the production process.

In the case of caviar production, the first attribute of Porters “Diamond” comprises the availability of land to build the production facility, the availability of skilled workers to operate the facility and the availability of infrastructure to transport the product. The US has these factors in abundance. As an industry, aquaculture farms need to be innovative because of environmental concerns. Porter’s stand is that lack of resources forces a firm to become innovative. In the case of Mote, the lack of resources can result in more efficient ways to grow, maintain and harvest the fish, create fish that have higher roe production and/or are more resistant to disease.

The second attribute in the “diamond” is demand. Caviar has always been a niche product and needs to keep the image of exclusivity and luxury. This may cause a slow market growth but since demand is still outpacing supply, it shouldn’t be an issue. Quality should be a primary concern since the target group for caviar tends to be sophisticated and well informed. Competition with Iranian- and other high quality caviar producers will force Mote to sell a consistently high quality product.

The third attribute, related and supporting industries doesn’t play a large role in caviar production. Apart from suppliers of fish food and the initial setup of the plant there are no supplies needed, the fish do most of the work.

Firm strategy, structure and rivalry, the fourth attribute defines the position that Mote as a US caviar producing company has on the international market. There are few competitors in the industry but the some of them are owned or heavily backed by governments. Kazakhstan sees the production of caviar as a matter of national pride and would do anything to back its wild- and cultivated caviar industry. A ban on Kazakh caviar has left the market with one main competitor, Iran which already faces sanctions on its own.


Actions.

The trade barriers for Iranian and Kazakh caviar has left the US domestic market open for domestic product. Left without the large US market however, both producers can concentrate on exporting to the markets that Mote is aiming for. Establishing a high quality brand name should be the first thing Mote should do. The cultivated fish eggs should be able to compete with the finest the competition can offer. Because of its luxurious image, the target market group should be high net-worth individuals and the group just below. Because Mote is a production company, it should hire a marketing company to successfully position its product in China and India. Connection with local food culture is crucial in these countries. In China this can be achieved by emphasizing the wealth and health bringing qualities of caviar. In India it should be seen as a rare luxury to be given to business associates and family as a sign of affluence.

Mote should take care to protect its intellectual property rights and patent breeding methods, technology and production. Especially when entering the Chinese market, the risk of “copycats” producing an inferior product is large.

Rise, demise and change of Lesotho’s textile industry

Clothes make the man. Naked people have little or no influence on society. ~Mark Twain

Abstract

This weeks’ paper will give an analysis of the textile industry of Lesotho. The case study “The market and the mountain kingdom; changes in Lesotho’s textile industry” (Rawi Abdelal cs. )
provides a description of the rise, demise and change of textile companies in the small African kingdom. Chinese and Taiwanese investors as well as the influence of changes in the global textile market have had a profound influence on the country’s economy. This paper will give a closer look at the reasons behind the creation of an labor and resource intensive industry in a country with limited infrastructure. It will place the role of textile manufacturing in a larger context, focusing on the role of international regulation. Finally it will analyze the role of government, labor organizations and foreign investors in the lifecycle of Lesotho’s textile manufacturing.


1. The emperor’s clothes; why textile is big in Maseru.

Lesotho, formerly known as Basutoland is a small kingdom that gained its independence from the UK in 1966. Surrounded by South Africa, the country was ruled by the Basuto National Party for the first 20 years. After a short but violent period from 1990 to 1993, during which king Moshoeshoe was exiled, constitutional government was restored. In 1998 elections resulted in violent protests culminating in an intervention by South African and Botswanan military forces. Since 2002 the country has been relatively peaceful although elections are often hotly contested and demonstrations are common[i].

The story of textile manufacturing in Lesotho doesn’t begin in the small African kingdom but starts with its larger brother South Africa and with Chinese entrepreneurs that have been present in most of Africa for centuries. As early as 1980, South African textile companies opened factories in Lesotho to circumvent sanctions on South African products because of the country’s strict apartheid policy[ii]. Most of the textile manufacturing plants were owned and run by Chinese and Taiwanese immigrants, who had come over in search of trade opportunities and found the less discriminating policy of Lesotho preferable to the racist apartheid laws in neighboring South Africa. After the end of apartheid the influence of China became even larger. The primarily agricultural economy of the mountain state was transformed when outside investors like the Taiwanese Formosa Mills started hiring more than 50,000 workers (mostly women) to man the cutting tables and sewing machines under sweat shop conditions. In 2005 the average wages was $38 per week working long hours on often unheated factory halls[iii]. Under the Multi Fiber Agreement and later under the Agreement on Textile and Clothing, Lesotho’s garments enjoyed preferential treatment over cheaper Chinese products in both the US and European markets. The effect the MFA treaty had on local manufacturers became even more apparent when it ended in 2005 abolishing quotas for Chinese made garments. For the Chinese and Taiwanese factory owners it made more economical sense to relocate to mainland China where labor cost was much lower and productivity higher than in Maseru. The results for the Lesothon industry were disastrous.

2. AGOA and the rescue of Lesothon textiles .

After the expiration of the MFA, Lesotho could still export to the EU market where it enjoyed a duty free status as least developed economy. In 1998 this status ended, leaving the industry in a serious predicament. Overnight, factories were closed, leaving the workers without pay let alone a severance package. Most of the factory workers had no warning of their employer’s intentions. Returning from a Christmas holiday they found the doors closed, the investors had left the country. Since only 11 percent of the kingdom's textiles industry was held in local hands it was easy to just close up shop and leave. Taiwan was by far the single largest foreign investor with a 65 percent share, followed by Hong Kong (13 percent), South Africa (five percent), Singapore (three percent) and Israel (three percent)[iv]. After the expiration of the MFA, little was left of this investment.

In 2000, the African Growth and Opportunity Act (AGOA) was passed. Drafted by Jim McDermott, a Democratic congressman, it was signed into law on May 18, 2000 as Title 1 of The Trade and Development Act of 2000. The Act offers tangible incentives for African countries to continue their efforts to open their economies and build free markets[v]. AGOA provides trade preferences for quota and duty-free entry into the United States for certain goods, expanding the benefits under the Generalized System of Preferences (GSP) program. Notably, AGOA expanded market access for textile and apparel goods into the United States for eligible countries.
The reasons for adopting this liberal stance towards potential competing countries on the textile market were more political then economical. As a democrat, McDermott saw the liberation of African countries out of the poverty trap as one of paramount importance. As the world’s largest export market, the US could help struggling economies like that of Lesotho attain a better standard of living. AGOA also appealed to Republican politicians because it granted economical freedom and allowed developing countries to enhance their position on the global market. The fact that AGOA could be used as a carrot and a stick at the same time should however not be underestimated. US policy in Africa after the cold war had decreased significantly. AGOA would boost US economic interest in Africa and would make African economies dependent on US import.
To benefit, African countries must convince Washington that they are not engaged in gross human rights violations and are making continual progress toward establishing a market-based economy. The latter provision effectively requires African countries to comply with structural adjustment programs (SAPs) and protect foreign investors and intellectual property rights. Civil society organizations in the US and in Africa have opposed such criteria as favoring multinational companies at the expense of poor Africans.
“This is less about African growth and more about American opportunity”, Dorothy Keet of the University of Western Cape told. The so-called market access that they are giving us, they are actually going to have to give to everybody over the next 10 years under the (World Trade Organization). But for a very minimal offer, they are extracting very heavy quid pro quos from us[vi]. For the eligible countries however, the results were more important than the “hidden” costs.
Under the AGOA, more specifically under the “Special Rule”, garments from Lesotho were granted duty free entry to the US market. The Special Rule provided this access as long as exports were below 3% (later 7%) of overall US garment exports. The results for the faltering garment industry were spectacular. By 2004 employment had almost reached its pre-MFA expiration numbers. Wages and conditions for factory workers had not improved however, most of the benefits were for the importing companies like Levy’s and GAP who could now import at lower cost.

3. Governments, Unions and Investors response.

The reaction of the Lesothon government has been almost completely passive. Their role in attracting investment and securing better conditions for its citizens, laboring long hours for minimum compensation has been very small. Companies were attracted to the small mountain state because it didn’t have the racist apartheid regime of South Africa and therefore could export without the sanction impediments placed upon its larger brother. There were little or no legal obstacles to build a factory, nor were there any repercussions when the owner decided to leave the country, leaving the workers often destitute. "Taiwanese companies together with ministers in our government, who are shareholders, are running the companies. It is very difficult to enforce the law", said Billy Macaefa of the Lesotho Clothing & Allied Workers Union[vii]. Like mentioned above, governments that did influence Lesotho often did so for political reasons not out of idealism. The US and EU governments are primarily concerned with protection of their domestic industries. As long as Lesotho doesn’t pose a viable threat and does what its foreign economic masters tell it to do, Lesotho will continue to be treated as a favored country.

The militant stance of the labor union has shied away a number of foreign investors. When China became Lesotho’s biggest competitor on the textile market, it became clear that even the low wages that Lesothon workers earned couldn’t compete with Chinese salaries. Exploitation of workers became an important point on the agenda of the LCAWU. Despite limited results, the Union represented a threat to the Chinese employers, who didn’t have to deal with their influence if they would relocate to China. The union claimed companies arbitrarily dismissed workers and many refused to recognize trade unions.
Investor’s response to the changing economic climate in Lesotho has been predictable. AGOA has created more opportunities for American companies to invest in Lesotho. Even China, faced with rising labor cost is re-outsourcing to Africa again.

To remain competitive, a company needs to keep cost down in the entire manufacturing chain. The original plants used readymade fabric from as far away as South East Asia to produce their garments. This made the transportation cost a major factor. Because Lesotho is an enclave, there are no cheap ways to provide large quantities of materials by ship. All materials were trucked in or transported by rail, and manually unloaded. To cut costs manufacturers have started to install weaving machines to produce fabric from cotton. The shorter supply chain allows easier management and lower inventory. High transportation cost remains an issue though.
A new response from investors is a result of the rising interest in “ethical” clothing. According to the ComMark Trust, a group working to develop Lesotho's textile industry, British shoppers spent almost $50 billion on ethical goods and services in 2005 - a high percentage of which was on clothing. Julia Hawkins, of the London-based Ethical Trading Initiative, says the demand in the US is just as high[viii]. The sweat shop conditions and low wages that attracted many investors before are now slowly replaced by alternative smaller scale plants that produce at higher cost but can be bought guilt free. Edun introduced the ONE Campaign T-shirt, made at its Lesotho factory, advertising that $10 of the $40 price tag would go to a new program that brings HIV testing and treatment to Lesotho's textile workers, an estimated one third of whom are HIV positive, another issue that remains unresolved. More than 30,000 shirts have been sold since they were introduced.


Sources:

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