This is a joint post with Vijaya Ramachandran

Trade policy is one of America’s most potent development tools, particularly for the world’s poorest countries. The big question has always been how best to use it. Should the US give away duty-free access to its $17 trillion market, essentially opening the door to anyone in the hopes of benefitting as many people as possible? Or instead, should it be granted only to those countries whose governments actually care about fostering a good business environment? After all, access to the US market won’t make a lick of difference if companies are smothered by bad policies at home. And the size of the US market prize may just incentivize governments to do better.

With the Africa Growth and Opportunity Act (AGOA) set to expire next year, the US Congress and Obama Administration should be debating these questions right now. In our view, they should give a thoughtful look at using AGOA eligibility rules to encourage business climate improvements.

This needn’t be a big stretch. AGOA was established as a compact with African governments, much like the Millennium Challenge Corporation became later. A grand bargain founded upon democratic pluralism, free markets, rule of law, and the protection of human and worker rights. The breadth of AGOA’s eligibility rules produced a true bipartisan compromise that has stood the test of time.

While Congress created these criteria equally, they have been implemented in highly unequal ways by the executive branch. Every year, the US President determines whether African governments have demonstrated “continuing progress” towards the AGOA eligibility criteria. Occasionally this leads to a big bureaucratic fight. However, it’s usually a pro forma process. Countries get rubber stamped unless there has been a military coup or gross human rights violations.

By our count, the US has never revoked (or granted) AGOA benefits because of economic governance reasons. Whether related to property rights, corruption, customs procedures, or other business climate issues. The kinds of things that directly impact whether African firms can become globally competitive, make use of AGOA preferences, and contribute to job creation and economic growth. In other words, democratic governance and basic freedoms have been stressed (a good thing), yet economic governance has been basically ignored (a bad thing). This is an odd practice for a policy tool focused on expanding economic opportunity. 

This isn’t a theoretical issue. Many African countries have failed to demonstrate “continuing progress” over the years, yet gained and maintained their duty-free access to the US market. Property rights have either worsened or not improved in 17 countries since AGOA’s establishment. The same goes for 22 countries on public sector corruption. Moreover, World Bank and AfDB data suggest that the competitive environment has deteriorated, or remains unchanged, in over half of African countries. 

Country Performance: Select Business Climate Indicators, 2012 Versus 2000

Source: 2013 Ibrahim Index of African Governance database

At this stage of the AGOA review process, all policy options should be on the table. This includes reforming US trade capacity programs (see a number of policy proposals here). It also means considering whether to use the country eligibility rules to incentivize business climate reforms. This could take the form of an MCC-like approach (see appendix C of our new paper for illustrative options). Under such an approach, the US government would track African governments’ performance on a number of indicators that reflect the biggest business climate challenges. Whatever the approach, several guiding principles should be stressed:

  1. Transitional Period: There should be a transitional period before any new eligibility criteria are applied, say for three years. This would give African governments time to implement business climate reforms.
  2. Transparent, Merit-Based Assessments: The criterion must be perceived as clear and real, with annual determinations being made transparently and on the technical merits. This includes a publicly-available methodology and use of third-party data.
  3. Policy Change Responsiveness: Measures should be responsive to government action (whether policy reforms or investments) on a timely basis. Undue time lags between effort and observed impact will lead to policy, political, and communication challenges.
  4. Balancing Eligibility Responsiveness and Volatility: The methodology should not lead to excessive volatility in countries’ eligibility status. At the same time, some reasonable degree of eligibility responsiveness will be necessary.

Ultimately, the big question is whether gaining (or maintaining) duty-free access to a $17 trillion market is a strong enough incentive for reform. And whether the US government is willing to focus all available policy tools on the biggest barriers to greater US-Africa trade. Namely, poor business climates that are preventing many African firms from becoming globally competitive.