AGOA and Dutch Disease: The case of Madagascar

AGOA and Dutch Disease: The case of Madagascar
Wednesday, 18 February 2015 ~ Soamiely Andriamananjara and Amadou Sy

The suspension of Madagascar’s African Growth and Opportunity Act (AGOA) privileges following its 2009 coup offers a natural experiment that allows analysts to study the impact of a tariff preference program on the recipient developing country, and then, subsequently, the impact of its removal. The situation provides two distinct but comparable states:  One with preferential access (2001-2009—the “AGOA years”) and the other without (2009-2014—the “sanction years”). 

Using readily available bilateral trade data from the U.S. Department of Commerce and the U.S. International Trade Commission to investigate Madagascar’s export performance in each of those two periods generates a number of useful and interesting insights. 

We find, not surprisingly, that Madagascar’s total exports to the U.S. declined following the loss of AGOA eligibility. However, a closer look at the composition of total exports shows that not all sectors were negatively affected by the sanctions. In particular, textile exports to the U.S., which surged under AGOA, fell abruptly while non-apparel and clothing exports gradually increased. 

The evolution of Madagascar’s exports to the United States during the “AGOA years,” can be summarized as follows.

  1. The preferential access to U.S. markets, enhanced by the generous rules of origin, led to a boom in textile exports;
  2. As the textile industry boomed, productive resources were drawn away from the rest of the economy and to the textile export processing zones;
  3. At the same time, the local currency (the ariary) started to appreciate, thereby hurting the competitiveness of the rest of the economy;
  4. As a result of the reallocation of resources and the real appreciation, non-apparel exports (such as other manufactured products or coffee, tea, and spices) declined significantly, leading to a decline in overall exports between 2004 and 2009.

During the “sanction years” (during which Madagascar lost its AGOA eligibility), the textile sector drastically shrunk, and it seems that the resources and factors of production (labor) were reallocated to the rest of the economy. As a result, although total exports to the United States fell immediately following the loss of access to U.S. markets for the textile sector, they gradually expanded as non-textile exports started to increase after 2010.

These sectoral dynamics during both periods are reminiscent of the “Dutch disease.” Let us elaborate:

As one would expect, the trade sanctions had negative impacts on the Malagasy economy. Madagascar’s total exports to the United States dropped significantly—by 56 percent—following the loss of AGOA eligibility. Exports decreased from an average of $312 million per year with AGOA to an average $136 million without AGOA (see Table 1). 

Table 1. Total exports to the United States, annual averages (in million USD)

brookings table1

The data also reveal that, during the AGOA years, only 70 percent (an average of $216 million) of Madagascar’s yearly exports actually entered the United States using preferential tariffs (Figure 1). The remaining 30 percent entered on an MFN (most-favored-nation) basis (i.e., no preferences).  


Figure 1. Madagascar: Total exports to the United States, 2000-2014, in million USD

brookings table2


The quasi-totality of the Malagasy exports that entered the United States under AGOA preferences was composed of articles of apparel and clothing accessories. This concentration was strongly facilitated by the third-party fabric rule of origin, which allows least-developed AGOA beneficiaries to utilize yarn and fabric from any country. It is not surprising that when Madagascar lost its privileges, its apparel and clothing exports to the U.S. dropped sharply—by 85 percent. This sectoral concentration of benefits has some important economic implications.

While the drop in the clothing exports is quite predictable and intuitive, it is the evolution of the non-apparel and clothing exports sectors that illustrates an interesting trend. In fact, at first glance, the data seems to suggest that by generating a boom in the Malagasy apparel and clothing sector, AGOA might have inadvertently caused other important sectors to shrink. The boom has, at least partially, led to an appreciation of the ariary during the AGOA years and hurt the competitiveness of those other sectors. Actually, it is possible that AGOA may have caused some kind of Dutch disease in Madagascar. 

While apparel and clothing exports boomed during the AGOA years, exports in other sectors actually decreased sharply in both absolute and relative terms (Figure 2). Non-apparel and clothing exports dropped from $119 million to $36 million between 2002 and 2009, and their share of total exports decreased from 57 percent to 15 percent. This change could have been caused by various factors, but one obvious suspect is the shift of resources and factors of production (labor) toward the booming sector, away from the (possibly more efficient) rest of the economy. As a result, total exports decreased between 2004 and 2009.

One can also find some complementary evidence of this resource movement by looking at the sanction years. It is interesting to note that total exports more than doubled, from $103 million in 2010 to an estimated $213 million in 2014, while the sanctions were in place (Figure 1). Decomposing this trend reveals that the jump in total exports was driven by non-apparel and clothing exports, which increased by 300 percent from $48 million in 2010 to an estimated $194 million in 2014 (admittedly, this was also driven by the new nickel exports). During that period, exports of apparel and clothing dropped by 65 percent. This change might suggest that when Madagascar lost its AGOA privileges, some resources and factors of production released by the shrinking textile sector might have moved to other (possibly more efficient) sectors in the rest of the economy.


Figure 2. Madagascar: Composition of exports to the United States  2000-2014, in million USD 

brookings table3

One obvious policy implication of the case of Madagascar is that trade preferences should be as comprehensive and inclusive as possible in terms of sectors. The discussion suggests that the impact of AGOA, while broadly positive, has been concentrated in too few sectors. The current focus on apparel and clothing (boosted by the third party rules of origin) can lead to perverse effects if it leads to excessive resource shifts and significant real exchange rate appreciation. The boom of the beneficiary sectors may have potentially had some unintended negative consequences on other non-beneficiary sectors in economy—possibly a Dutch disease-type of impact that can lead to undesirable overall outcomes.

Note: These are the authors’ personal perspectives and do not necessarily reflect those of the World Bank or the Brookings Institution.

View related news articles

US apparel buyer linked to sourcing opportunities in Madagascar

On August 26-30, the USAID East African Trade and Investment Hub conducted a buyer mission to Antananarivo, Madagascar for a large publicly listed U.S. apparel company. The U.S buyer engaged with apparel companies in Madagascar and identified several sourcing opportunities that could support its production of apparel and related fashion goods across several top brands.  “Madagascar’s private sector is recognizing and fully embracing...

05 September 2018

Madagascar may be more than a few steps ahead of Ethiopia for sourcing

Madagascar may not be getting the same publicity as Ethiopia when it comes to the topic of sourcing in Africa, but the island nation off the southeast coast of the continent has a lot to offer that few are talking about. One thing that sets the nation apart for sourcing is its history in textile manufacturing. Madagascar had already been a go-to source for making apparel in Africa before a coup in 2009 saw the country lose its trade benefits...

21 March 2018

Federal Register - Madagascar and Guinea comply with AGOA visa system

The AGOA (Title I of the Trade and Development Act of 2000, Public Law 106-200, as amended provides preferential tariff treatment for imports of certain textile and apparel products of beneficiary sub-Saharan African countries. The textile and apparel trade benefits under AGOA are available to imports of eligible products from countries that the President designates as “beneficiary sub-Saharan African countries,” provided that these...

15 December 2014

Africa: President Obama removes Swaziland, Reinstates Madagascar for AGOA benefits

President Obama reinstated Madagascar's eligibility for African Growth and Opportunity Act (AGOA) benefits, effective immediately, and withdrew Swaziland's AGOA eligibility, effective January 1, 2015. Madagascar Madagascar was removed from AGOA on January 1, 2010 following a 2009 coup d'état. Successful elections in late 2013 led to the formation of Madagascar's first democratic government since the 2009 coup. The United States has taken...

27 June 2014

Madagascar's exclusion from AGOA to continue for now

The United States will not restore trade privileges to Madagascar this year, according to a statement received Saturday that cited human rights concerns and the failure to restore democracy in the Indian Ocean nation. Madagascar has been excluded from the Africa Growth and Opportunity Act (AGOA) programme since 2009 when then president Marc Ravalomanana was overthrown in a coup that left Andry Rajoelina in charge of a transitional,...

06 January 2013

Madagascar textile sector posts 20% growth in 2011

The textile industry in Madagascar, an island country located in the Indian Ocean off the southeastern coast of Africa, has recorded 20 percent growth last year, the Group of Free Enterprises and Partners (GEFP or Groupement des entreprises franches et partenaires) has said. The increase in the sector's performance is mainly owing to a rise in exports of Malagasy products to the European markets, said Charles Giblin, President of GEFP. Mr....

16 February 2012

Madagascar: Donors deliver despite sanctions

After more than two years of political crisis, Madagascar finally appears to be moving towards the restoration of democracy. A new prime minister has been appointed, and elections are planned for 2012. Donors who suspended aid to the impoverished island nation are watching these developments closely. "I think no one will be coming out of the woodwork unless they see that the Malagasy are serious about their transition," said USAID Country...

01 December 2011

Madagascar: Clothing producers face hard times following AGOA suspension

Madagascar's textile and clothing sector has been harmed by the country's suspension from the US African Growth and Opportunities Act (AGOA), after losing these trade benefits last December. "More than 60,000 jobs were lost since the beginning of this year when Hong Kong companies were closed down with the removal of these trade facilities," says John Hargreaves, vice-chairman of the Madagascar Export Processing Zone Association. The...

22 October 2010

Madagascar eligibility: US Dept of State press release

Madagascar has been a leader in the utilization of the trade benefits under the African Growth and Opportunity Act (AGOA) since becoming eligible in October 2000. The Act requires the President to annually designate countries as eligible to receive the benefits of AGOA if they have established, or are making continual progress in certain criteria, including the rule of law and political pluralism. The March 2009 undemocratic transfer of power...

10 December 2009