The potential impact of trade on the economy of Lesotho
Bahta, Yonas Tesfamariam
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The potential impact of trade on the economy of Lesotho was assessed using the Lesotho Social Accounting Matrix (SAM) 2000 as a data base to construct a Computable General Equilibrium (CGE) model, to design trade policy scenarios, and to simulate the impact of trade policy scenarios on the Lesotho economy Since the Lesotho SAM was unbalanced, it was necessary to balance the initial matrix, using the cross-entropy optimization procedure with the aid of GAMS software. Four simulation sets were carried out. Results from two sets (duty-free access (DFA) and a +10% increase in world prices) indicate significantly increased textile exports and decreased prices for imported commodities. DFA will also be associated with increased textile imports, while a +10% increase in world prices will lead to increased crop imports. Demand and supply prices of textile commodities produced and sold domestically will decrease, as will composite goods prices in the textile sector. Average output price of textiles will decrease with DFA and with a 10% increase in world prices; the aggregated marketed commodity quantity for textiles will increase. Output prices of fruit and vegetable processing and intermediate aggregate inputs for the textile sector decrease with DFA. An increase of 10% in world prices will lead to increased water service prices. The textile sector will experience increased value added prices in both scenarios. Gross domestic product (GDP) for the textile sector will increase significantly. Lesotho will gain in welfare, measured in terms of equivalent variation (EV). Effects on labour categories depend on changes in productive activities. In the textile sector, labour demand, labour income, and capital income will increase significantly. Lesotho’s net commodity exports and gross government expenditure will also increase. Erosion of existing preferential access (EEP) and common external tariffs for non-SACU member states (CET) will reduce the quantity of textile products exported; with EEP, the price of imported textiles will increase and the quantity decrease. CET will have similar effects on the skins and hides sector. Demand and supply prices of textile commodities produced and sold domestically (with EEP) and pharmaceutical products (with CET) will increase. Prices of composite textile goods will increase slightly. Average output price for textiles at EEP and pharmaceutical products at CET will increase, and the aggregated marketed commodity quantity for the textile sector will decrease in both scenarios. With EEP, prices of output and intermediate aggregate outputs of textiles and micro industry outputs will increase. CET effects will be smaller. The textile sector at EEP and accommodation-catering services at CET will experience decreased prices of value added. Gross domestic product (GDP) of the textile sector will decrease. Welfare or equivalent variation (EV) will decline. Employment in the textile sector will decline with a concomitantly small decrease in labour and capital income. The EEP regime will lead to decreased total government consumption expenditure, while CET will cause a slight increase; this translates into decreased net commodity imports. Effects vary among economic sectors. Performance in U.S. markets indicates that Lesotho’s textile exporters have been competitive under MFA/ AGOA arrangements. This competitiveness can, however, be jeopardized by lower costs in some Asian countries. The policy makers should develop permanent comparative advantage to avoid the risk of losses when temporary tariff preferences are discontinued. Lesotho’s export trade is highly concentrated, both in terms of products (textiles) and markets. Diversification of products and markets is prerequisite for avoiding failure and for sustainable development of the country; considerable manufacturing potential for export diversification exists in furniture, bricks, sandstone and ceramics, wool and mohair products, pharmaceutical products, and the recently revitalised diamond industry. Export trade development and market penetration to non-US destinations should receive attention. In this process, the government should strengthen the capacity of the private sector to deal effectively with rapid change and growing competition by means of, for example, knowledge dissemination, technological transfers, and negotiations for improved market access for textile and other potential export products.