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Global trade: Unfolding curse of low expectations

File pic: Global trade

Global trade plays a significant role in promoting sustainable development and has received tremendous support over the years as it is believed that trade is the route to end poverty.

A notable trend has been observed as developing countries endeavour to be the next China, which opened its markets in 1978, after 30 years of communism and has now become the world`s export powerhouse, about to seize the position of the world's biggest economy from the US.

This feat seems not to be easily replicable as explained by the unfolding curse of low expectations.

The push to increase trade saw the World Trade Organisation establish an Aid for Trade Initiative in 2006. As of mid-2017, over US$300 billion had been disbursed for various programmes to help developing countries trade with the end goal of eradicating poverty. This assertion was then tested by the performance of a project by a US-based NGO. This project was named “From Aid to Artisans (ATA)”, which helped producers of handmade products in developing countries to access international markets. The programme followed a standard procedure, where ATA would work in the country for some years through a local intermediary and then pull out leaving it strong enough to continue running and growing the project.

The first port of call was disbursement of funds to a local intermediary, Hamis Carpets in Egypt, in October 2009, earmarked for producing carpets, a product that appealed to high-income markets. This product seemed ideal as handmade rugs were an important source of employment in Egypt, and there was matching demand for them in the US. Hamis was already marketing many of the carpets locally, although for the most part they were not exported. Hamis Carpets and ATA then set out to decide what kind of carpets to make, find the buyers, and generate orders. That took a lot of effort.

ATA brought the CEO of Hamis to the United States for a training course, hired an Italian consultant to design rug samples, and showcased Hamis’s products in every gift fair and to every importer they knew. Despite all this, it was only after one and a half years of searching for customers that Hamis Carpets secured its first significant export order, from a German buyer. From this point on, business picked up. A US NGO with good contacts and financing, a fearless team of very committed and talented young researchers, and a solid firm with a good domestic reputation took five years to get a decent amount of orders, enough to give sufficient work to occupy 35 small firms.

Without the external push from ATA, it probably would not have been possible for the local intermediary to make this work. It is important to understand that international trade was unlocked by the reputational capital that shapes expectations that arise from a brand name.

From the point of view of a foreign buyer (often a large retailer or online store with a brand name), buying from a small carpet manufacturer in Egypt is a gamble. For them quality is critical. Customers expect it; they want flawless carpets, and so is timing. If the carpets are not ready for the launch of the new spring collection, the sellers take a big hit. In addition, there is no way to pass the entire risk back to the manufacturer.

While it is possible to refuse to pay the manufacturers if quality is low or there is a delay, what the retailer can claw back by returning carpets or refusing to pay is peanuts relative to the reputational loss (think of irate buyers’ web posts about the low quality of products) or the cost of missing the spring collection deadline. In principle, firms can also agree on penal damages (the manufacturer agrees to pay a certain large amount of money for every day of delay, say), but good luck collecting from a small-town, Egyptian firm that could vanish overnight. Nor is it feasible for the retailer to check every single carpet to avoid any reputational risk; it would cost way too much in staff time. Another possibility might be to offer the products so cheaply that consumers were willing to accept the risk of some defects, knowing they could always send the carpet back. It turns out this does not always work, because in many cases the price cannot go low enough for consumers to waste their time with a product they don’t trust. Why stake reputation on delivering a product as close to perfection as possible? Why not lower expectations along with prices?

This is why Amazon goes to great trouble to maintain its reputation for excellent service. In some cases, for example, they protect the customer’s time by not requiring them to return the defective product. For the same reason, Amazon then wants to deal with a producer it can totally trust, ideally a company they have dealt with before, or at least one with a reputation for good products and good service. For both customer and retailer, time is money.

The structure of global inequality is such that the kind of customers in the West who would buy a handmade carpet or a hand-printed T-shirt (labor-intensive products for whose manufacture poor countries have a comparative advantage) are often so much richer than the makers that any savings from a new entrant offering cheaper prices will be insufficient to compensate the customer for their lost time or the ruin of a favorite blouse.

Take the example of a Zimbabwean manufacturer trying to compete with a US company on T-shirts. Assuming a work-week of 40 hours, the hourly wage in US is about $7,25 an hour, while in Zimbabwe it is $0,90. So the savings in labour cost to handprint a T-shirt that takes an hour to make (a very, very nice T-shirt) in Zimbabwe rather than in US is at most $6,35. In fact, as buyers, many of us would happily pay the extra $6,35 for

the peace of mind its quality assures. Amazon knows that. Why would it pay to experiment with the unknown guy in Zimbabwe when it has a known and reliable supplier in the US?

Having a name also helps. It is no accident that Gucci, originally a high-end leather goods producer, now sells everything from car seats to perfume, and that Ferrari, which started with sports cars, now sells eyeglasses and laptops.

Buyers of Gucci perfumes or Ferrari laptops probably don’t expect particularly innovative products from those brand names. They are going, rather, for the assurance that Gucci and Ferrari value their good names too much to sell low-quality products, and perhaps the bragging rights that come with buying something clearly expensive.

Similarly, for a new country trying to get into the market, it is not only your own name that counts. Japanese cars are known to be well built, Italian cars are famous for being stylish, German cars are great to drive.

A new Japanese entrant, like Mitsubishi when it first entered the US market in 1982, probably benefited significantly from the success of older Japanese brands. Conversely, buyers are unlikely to want to try out a car produced in Bangladesh or Burundi, even if it is supposedly made to the most exacting standards, the price is low, and the reviews are good. God knows, they will wonder what might go wrong in a few years. And they may well be right. It is possible that it would take many years of experience producing for the domestic market to know how to make a good car. That is how Toyota, Nissan, and Honda got started.

However, suspicion of newcomers can also turn into a self-fulfilling prophecy. If almost no one buys the car, the company will collapse and customer service will cease. Or if everybody expects the Egyptian rugs to fade, then they will sell for very little money and therefore it would not pay for entrepreneurs in Egypt to invest in producing higher quality rugs. It’s a vicious cycle.

Thus the curse of low expectations can be very hard to overcome. Even if a firm chooses to deliver the highest-quality products, sufficiently pessimistic buyers will assume it is just a matter of time before the quality goes down. This is where it can be very useful to have the right connections: someone who knows you and will vouch for you.

Interestingly, this system may be changing. A substantial part of the business model of online companies like Amazon, is to insert themselves in place of these intermediaries by allowing individual producers to build their own reputations on their sites, for a price of course, thereby not requiring certification from the intermediary. Of course, it will take some time for these new marketplaces to cement their reputations as guarantors of quality (and they may yet fail). Until they succeed, it is essentially impossible for an isolated producer in the third world to start competing on the international market, however good its product is and however low its prices are.

As such, developing countries' efforts to penetrate global markets continue to be haunted by the curse of low expectations, thereby threatening the sustainable development goal of eradicating poverty in all its forms.

Mandeya is a Zimbabwean economist currently based in Canada. These weekly New Horizon articles are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852.


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