business, enforcement of contracts and reducing the number of days needed for imported goods to clear customs.<sup>19</sup> The situation in Kenya, where exports to the US have been sustained, highlights the challenges and opportunities (see Ozden (2005) for more details). Labor costs in Kenya are relatively low compared to key competitors. Information on labor cost per shirt produced suggests that costs in Kenya ($0.18) are below those of China ($0.29) and comparable with those of India ($0.17). Accompanying the rapid increase in exports to the US has been entry into new product categories. More importantly these categories tend to be of higher price and quality. In addition, for a number of products, movements in relative prices suggest that Kenyan exporters have managed to improve the quality of their products, which augers well for their ability to withstand more intense competition.

Kenyan exports are currently totally concentrated on the US market. Although the nature of the EU market is less harmonized in terms of tastes than that of the US, there are still substantial opportunities in the EU market. The value of exports to the US is a multiple of 34 times greater than exports to the EU. At present, Kenya can export duty free to the EU (a margin of preference lower than the US, but still significant at around 12 percent) but faces the more restrictive rules of origin requiring production from yarn. If the EU were to adopt less restrictive rules of origin this may help to stimulate Kenyan’s apparel exports. If the US were to make permanent the non-restrictive third country fabric requirement or adopt a general 10% value-added requirement for AGOA this would increase the pressure on the EU to adopt such development friendly rules of origin.

On the other hand, the World Bank’s Investment Climate Assessment for Kenya highlights how competitiveness is undermined by high indirect costs, with the main barriers being corruption, crime and infrastructure. The key infrastructure barriers are poor transport, the high cost and unreliability of power services and costly and poor quality fixed-line telephone services. These costs undermine the advantages that Kenya possesses in terms of low cost, relatively well-educated labor, they depress productivity and constrain investment. Eiffert et al (2005) conclude that for Kenya “a long history of entrepreneurship is reflected in strong potential factory-floor productivity, but high costs and losses impede competitiveness”. The key implication of the poor business environment is lower returns to labor in production which depresses labor demand and real wages. Thus, Kenya possesses advantages that would support a trade oriented strategy based on competitiveness in global markets but these advantages are undermined by a range of cost raising factors.

# **8. The Role of Preferences in Stimulating African Exports**

While exports to the US of most of the countries which receive significant preferences (Malawi and Mauritius are the exceptions) have grown strongly since 2000 a number of countries that do not receive significant preferences have also grown strongly. For example, AGOA preferences are of little importance to Cameroon but exports to the US have almost doubled since 2000. Hence, there is no correlation between the magnitude of benefits from AGOA preferences and recent growth of exports to the US. Thus, while AGOA preferences have played a role in stimulating exports from some African countries, they are just one factor

> 19 See www.doingbusiness.org

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