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Struggling Lesotho Signs MCC Compact
The Washington Diplomat / September 2007

By Larry Luxner

Lesotho, a tiny, mountainous African kingdom plagued by severe soil erosion, malnutrition and rampant AIDS, will receive a $362.6 million grant from the Washington-based Millennium Challenge Corp., whose slogan is "reducing poverty through growth."

The bilateral compact was signed Jul. 23 at the State Department by MCC's chief executive, John Danilovich, and by Mohlabi Kenneth Tsekoa, Lesotho's minister of foreign affairs and international relations. Witnessing the signing ceremony was Secretary of State Condoleezza Rice and Lesotho's prime minister, Pakalitha Mosisili.

"MCC congratulates the people of Lesotho for reaching this important milestone," Danilovich told dignitaries and guests at the event. "The people of Lesotho have demonstrated their resolve to create hope and opportunity within their country by developing a results-oriented program which reflects their priorities for poverty reduction and growth. MCC looks forward to building on this dynamic partnership."

Lesotho, slightly smaller than Maryland, is completely surrounded by South Africa. Average life expectancy at birth is only 40 years, a consequence of Lesotho's frightening AIDS epidemic. Some 35% of Lesotho's population is HIV-positive one of the highest infection rates on Earth.

As such, $122.4 million out of the total five-year Millennium Challenge Compact will pay for the renovation of up to 150 health centers, as well as the establishment of anti-retroviral therapy clinics for AIDS sufferers and other health-related expenditures.

By 2013, says the MCC, its compact "will benefit the majority of the population of 1.8 million due to its broad geographic scope and focus on sectors that impact most Basotho such as health and the provision of water."

Another $164 million will finance the building of a bulk water conveyance system and improve sanitation for an estimated 25,000 households through the construction of ventilated pit latrines and water systems, among other things.

In addition, $36.1 million will go towards increasing private-sector economic activity in Lesotho by improving access to credit, slashing transaction costs and boosting the participation of women in the formal economy. A final $40 million will be spent on administration, management, auditing, monitoring and evaluation, as well as environmental and social oversight.

"Lesotho is one of the top performers in the MCC selection criteria," said Maureen Harrington, the MCC's vice-president for policy and international relations. "We've found that a number of private-sectr groups are taking notice of this criteria. We've had a number of large multinationals tell us they're using our indicators when thinking about where to expand their business."

She added: "We understand that the rating agencies are also looking at whether countries qualify for MCC money, as well as a number of private-equity firms."

Despite its enormous challenges, one area where Lesotho has distinguished itself is the apparel and textile sector. The tiny country currently produces one-third of all apparel exports in sub-Saharan Africa, says A. Mark Neuman, counselor for international trade and global strategies at Limited Brands Inc.

"One thing we understand as retailers is that achieving success is wonderful," said Neuman. one of several speakers at a July business conference on Lesotho co-sponsored by the MCC, the Lesotho government and the Corporate Council on Africa. "But sustaining growth is very, very hard. That's the inconvenient truth. Lesotho is winning here, but the growth has now ended, and there's a couple of reasons for that."

For one thing, in the last two years total exports under the African Growth and Opportunity Act (AGOA) have fallen from $1.7 billion to $1.3 billion, at a time when overall apparel exports were rising by double digits. And even though Lesotho has managed to increase its share of AGOA exports from 26% to 31%, since 2004 Chinese apparel exports have jumped by $9.5 billion, or 107%.

"That's four times more than Lesotho exported in the seven years since AGOA was implemented," said Neuman. "In six months of unrestrained trade in 2005, China's exports of cotton knit shirts to the U.S. were greater than the past seven years combined. If China is unrestrained in 2008, Lesotho will no longer be able to compete."

But the problem isn't only China. Neuman also blames U.S. subsidies to domestic cotten producers, which depress cotton prices around the world.

"Only 0.15% of U.S. cotton imports came from sub-Saharan Africa in 2005. These massive cotton, yarn and fabric subsidies push Africa out of the apparel supply chain, which I think is a disgrace," he said. "My vision is a vertically integrated African supply chain and world market free of unfair subsidies that harm the poorest people in the world."

Timothy Thahane, Lesotho's minister of finance and development planning, agrees with that assessment.

"The critical thing for most countries in sub-Saharan Africa is that we don't have diversified economies," he said. "Consequently, we depend on our textile industry, which engages more than 45,000 people. Each of those workers supports four to five other people, so [preventing] even a 1% or 2% cut in exports is critical to our survival."

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