Lesotho Case Analysis essay

Developing countries face numerous challenges on their way to economic prosperity. “Development is deemed as a multidimensional process involving major changes in social structures, popular attitudes, and institutions” (CBL Economic Review). To achieve its strategic economic objectives the Kingdom of Lesotho has to overcome a set of serious economic barriers. The latest economic research data suggest that the time has come, when the country should address its economic issues at the macroeconomic level. Analysis of Regional Economy and Basic Industries

Textile industry always formed the basis of Lesotho’s economic development, but Lesotho did not rely on textile industry only. The Kingdom of Lesotho was well known for its mining industry: Basotho workers made up 19% of South Africa’s entire mining labor force (Abdelal et al 3). Water exports provided Lesotho with additional economic stimuli and could potentially become a reliable source of employment for local population. South Africa paid 180 million rand for Lesotho’s water, and the Water project could generate more than 4,000 jobs (Abdelal et al 3).

However, the country lacked high quality electrical infrastructure; moreover, the lack of legal infrastructure in the country prevented the country’s authorities from completing the project in time. Now, Lesotho has a comparative advantage against other South African countries for its water resources; this competitive advantage may help the country survive through its persistent economic crisis. Macroeconomic Analysis of South Africa and Lesotho Geographically, the Kingdom of Lesotho “is a mountainous country with a total area of 30,355 km2” (Omole).

For a long time, Lesotho was ranked among the 42 least developed countries of the world (Omole). The results of macroeconomic research suggest that Lesotho is one of the 40 world’s countries with the lowest income per capita; despite the continuous and rapid economic growth between 1990 and 2000, the country was not able to stabilize its GDP growth. Among the 225 world countries, Lesotho ranks 171, with only $3. 09 billion GDP (Index Mundi). Since 2007, Lesotho’s economy has grown 4. 8%, but the issues of economic instability have not been resolved.

The rates of unemployment remain almost unchanged – 45% is higher than the average unemployment index in South Africa (30%) (Index Mundi). Manufacturing (and textile industry in particular) remains the basis of the country’s economic growth and the major source of the country’s income. For several years, Lesotho’s government enjoyed the budget surplus of approximately 4% of national income (Abdelal et al 2). Exchange Rate Issues Lesotho’s authorities keep to the principles of a fixed currency rate, where the local loti is pegged to the South African rand.

The fixed course and its being pegged one to one to the rand deprive apparel firms of the stimuli for stable economic development and business performance. Lesotho’s apparel firms export almost all their products to the U. S. ; as a result, apparel firms fail to tackle inflationary pressures that stem from the country’s reluctance to implement a floating exchange rate. “The loti was pegged 1:1 to the South African rand; […] the massive exchange-rate swing had been disastrous for the apparel exporters, who were even more dependent on South Africa for purchases” (Abdelal et al 7).

Under the pressure of the 100-basis-point interest rates, and taking into account the negative predictions regarding revaluation, apparel manufacturers in Lesotho have almost completely lost their chance for economic revival. Analysis of Trade Barriers The country substantially benefited of the American AGOA policies in the past: the AGOA’s Special Rule “allowed the 33 AGOA beneficiaries with LDC status to export apparel both duty- and quota-free, regardless of the origin of the textile inputs” (Abdelal et al 5).

Now, trade barriers have almost killed the whole apparel industry in the country. First, the majority of WTO members extended their textile quotas in 2005. Second, the expiration of previously beneficial AGOA will doom apparel firms to economic and financial failure. Third, textile manufacturers in Lesotho find themselves unable to compete to the growing market presence of China. Finally, Lesotho does not have any reliable guarantees that Nicaragua will not break its phase-in agreement with Lesotho, for the sake of better access to CAFTA’s markets (Abdelal et al 8).

Although the country still finds itself under the governing protection of the U. S. and EU rules, international countries gradually distance themselves from the need to import apparel products from Lesotho, and turn their heads to more proficient and structural Chinese manufacturers. Other Economic Issues Transportation costs in Lesotho are very high. “Transportation costs represent between 7-10% of the total cost, including all export expenses” (Abdelal et al 9).

Lesotho is facing serious productivity problems: “a 2003 report based on three representative factories found overmanning in excess of 15% in all parts of the production process” (Abdelal et al 9). The country should address gender and HIV issues need to be addressed at the national level, to keep Lesotho’s economy afloat. Recommended Course of Action The country should invest substantial resources into the development of its transportation infrastructure: better transport will decrease apparel firms’ transportation costs, and will make Lesotho’s apparel products more attractive in international markets.

Second, apparel firms need domestic and foreign investments, to resolve its productivity issues. Third, the state should pay more attention to its currency rate regime: with the loti pegged to South African rand one to one, Lesotho’s apparel industry is likely to face bankruptcy risks in the nearest future. Fourth, the country is responsible for the successful outcomes of its national and international negotiations with the major economic powers (the U. S. , Canada, and the WTO).

These elements will make apparel products from Lesotho more competitive in response to the expanding Chinese domination in the international textile markets. Water resources provide Lesotho with a comparative advantage; these can be used as the source of additional financial resources. These financial resources will provide Kingdom of Lesotho with a chance to restructure and revive its textile industry. Works Cited Abdelal, R. , Abrami, R. , Maurer, N. & Mussachio, A. “The Market and the Mountain

Kingdom: Change in Lesotho’s Textile Industry. ” Harvard Business School, November 9, 2006. CBL Economic Review. “The Loti-Rand Peg: Benefits and Costs. ” 2006. Central Bank Publications. 09 December 2008. http://www. centralbank. org. ls/publications/economic%20review%20-%20may%2006. pdf Index Mundi. “Lesotho. ” 2008. Index Mundi. 09 December 2008. http://www. indexmundi. com/lesotho/ Omole, D. “Poverty in Lesotho: A Case Study and Policy Options. ” 2003. GDNET. 09 December 2008. http://www. gdnet. org/fulltext/omole. pdf