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A RESEARCH PAPER TOWARDS THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE MASTER OF ARTS DEGREE IN ECONOMIC POLICY MAN

DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002. A RESEARCH PAPER TOWARDS THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE MASTER OF ARTS DEGREE IN ECONOMIC POLICY MANAGEMENT, MAKERERE UNIVERSITY.

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A RESEARCH PAPER TOWARDS THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE MASTER OF ARTS DEGREE IN ECONOMIC POLICY MAN

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  1. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 A RESEARCH PAPER TOWARDS THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE MASTER OF ARTS DEGREE IN ECONOMIC POLICY MANAGEMENT, MAKERERE UNIVERSITY

  2. Presented toJJ/WBGSP Scaling Up Program, Nairobi Kenyaby MBAYANI SARUNI, Economist, Ministry of Planning, Economy and Empowerment - TanzaniaOnMay 11, 2006

  3. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 • External trade environment and domestic policies have a great impact on trade and economic growth • Sinceindependent (1961), Tanzaniahaspursueddiverseeconomicpoliciesaimedatimprovingtradeandenhanceeconomicdevelopment • Domestic policies involved included • exchange rates; • tariff structure,; • export taxation; • import control; • foreign exchange allocation systems; and • adjustment policies to external policies. Background to the study

  4. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Background to the study • Trade policy instruments (Tariff-based instrument, NTB) have also been used BUT in line with international obligations and regional settings to influence the direction/pattern of trade development • The aim of these trade policy instruments were: • Stimulate domestic production • Promote exports • Safeguard domestic industries against dumping (Protectionism?) • Consumer protection

  5. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Background Cont…….. Three Trade regimes • 1. The pre-Arusha era (1967) • This was liberal one inherited from colonial era • Private sector played a big role as engine of growth • Export was basically unprocessed/semi-processed agricultural commodities (Traditional exports) and other raw materials • 2. Post Arusha declaration • Characterized by government intervention and control • “Confinement policy” adopted in 1972 to control all major economic activities including trade • Trade policy was based on tariffs and quantitative restrictions • Policy instruments used were price controls, import quotas, rationing, administrative resource allocation and the use of permit to control movement of G/S • Protectionism was imposed with import duty used as control tool

  6. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Background Cont…….. Trade regimes cont……. • Infant industries protected failed to meet even local demand –WHY? • Limited internal capacity & series of oil price shocks • Inadequate resource mobilization and inefficient allocation • Decline private sector activity and FDI due to nationalization • Prevalence of underground financial and goods markets • By mid-80s the prevalence of controls in a situation of increasing shortages made change in trade policy imperative. • 3. Liberalization and structural adjustment • SAP was introduced in the 1980’s, following severe macroeconomic imbalances which Tanzania started to experience like rising inflation rate, falling real GDP growth rate, widening fiscal and trade deficits. • Trade liberalization as one of the SAP’s concern was adopted effectively from 1993 following the failure of the restrictive policies to achieve the desired objectives

  7. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Background Cont…….. Trade regimes cont……. • Policy reforms measures introduced were: • Liberalization of imports, interest rates and exchange controls • Devaluation of shilling; and • Price decontrol. • Successes in this regime were minimal, partly because of difficulties in marketing agricultural exports and partly because of an increase in parallel market and deteriorating terms of trade • Other initiative taken to promote export sector include • Review of tariff rates - Incentive packages to investors (e.g tax holday) • Participation in regional integration • Privatization and restructuring of state owned firms – to improve efficiency in domestic production • Initiation of Export Development Strategy (EDS) aimed at the establishment of an appropriate environment and framework for increasing exports. • Adoption of the National Trade Policy in 2003 - objective - to enable Tanzania identify ways and means of navigating through a viable and steady path towards competitive export-led growth for the realization of poverty reduction goal.

  8. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Background Cont…….. ExportPerformance • Capacity of export earnings to finance import bill has increased from 24% 1990 to 57% in 2002 and to 63% in 2005 • The share of traditional export to total export declined from above 50% in the 1990s to around 20% in 2002 • This indicates the beginning of a diversification process in the structure of exports from that dominated by traditional agricultural exports to non-traditional exports like fish, minerals and few industrial products. • Exports were increasing, so as imports • Despite all those efforts and reform measures, TB was negative since 1970s

  9. Background Cont…….. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Trade Balance

  10. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Problem Statement • Tz. has never experienced trade surplus since 1970’s • Macroeconomic reforms & various policies/strategieswere adopted:BUT TB still not improving • Some policy variables could be the cause • What are they? The objective is to explore them • Significance: - • Add knowledge to the existing literature • Guide to policy makers • Give insight of measures to be taken to improve TB • Scope:Merchandise Trade (Hard to get information on trade in services and Factors of Production like labour) • Variables: G, C, RER, FDI, YF, M and X (TB) • Timeframe: 1970 - 2002

  11. TRADE AND ECONOMIC OVERVIEW The Concept of Trade • International trade has traditionally been understood as involving the movement of goods and services across national boarders. • “Services” covers a wide range of economic activities like tourism, recreational, financial, consultancy services etc • In most cases however, the role of services has been erroneously confined to the facilitating aspect while emphasis being placed on trade in merchandise. • Due to data limitation, I will also cover only merchandise trade

  12. TRADE AND ECONOMIC OVERVIEW The Concept of Trade Cont…… • Features characterizing Tanzania’s foreign trade: • Persistence balance of trade deficit; • domination of primary goods in the export basket; and • Domination industrial goods in the import basket. • Major trading partners • Imports from: EU, Japan, USA, SA, Kenya, China, India and UAE • Export destination: EU and India,

  13. TRADE AND ECONOMIC OVERVIEW Trends in World Trade and the Place of Sub-Saharan Africa • LDCs in total account for less than 30% of world trade • SSA’s share (excluding SA), has declined from 5% to around 2% over the past decade • SSA countries continue to trade in primary commodities, (agriculture & mining) • Very minimal contribution to manufactured goods

  14. TRADE AND ECONOMIC OVERVIEW Trade Performance in Tanzania • Declining trend in total exports earnings and increasing imports (financed through external borrowing or assistance • Traditional exports are mainly agricultural goods (coffee, cotton, tobacco) • Contribution of traditional exports to total export earnings is declining from an average of above 50% in the 1990s to below 25% • Reasons: Price volatility, rainfed, Deteriorating TT

  15. TRADE AND ECONOMIC OVERVIEW Trade Performance Cont……. • Of recent, non-traditional exports (notably mineral and fish products) are leading • Other sectors are picking up: • Mineral (7% in 1994 to 43% in 2002) • Manufacturing (6% late 1990s to 7.4% in 2002) • Export earnings in totality keep on increasing annually, so are the import bills

  16. TRADE AND ECONOMIC OVERVIEW Trade Performance Cont….. • Imports dominated by capital goods (41%): • large inflows of FDI (mining), • Implementation of major government projects like roads construction • Consumer Goods (30%) • Food and • Other consumables (Electronics, Cars etc.) • Intermediate goods (29%) • Oil and • Industrial raw materials

  17. TRADE AND ECONOMIC OVERVIEW Regional and International Cooperation • Tz. is a member of EAC and SADC as a way to boost trade • Also committed in other bilateral and multilateral arrangements, (WTO & AGOA) • Yet, not benefited much from these regional and international corporations • Low industrial base • High unit cost of production • Low quality goods • Considered to be consumers of foreign goods rather than producers

  18. Liberalization and Globalization TRADE AND ECONOMIC OVERVIEW • Trade liberalization & globalization present daunting challenges to Tanzania, but also provide opportunities for increasing its share in world trade • Liberalization: Lifting restrictions on trade (Tariffs &NTB) • Is this the solution to enhance competitiveness of domestic firms and entrepreneurs? More need to be done probably • Globalization is beneficial in terms of trade development through enhanced access to the world market BUT the main challenge is • How to effectively and gainfully participate in the emerging global market? This call for the need to address constraints limiting meaningful participation and integration into the global economy

  19. LITERATURE REVIEW • Reference has been made from various empirical studies, researches and journal worldwide • From the LR, many researchers agree (and have found empirically) that the variables in question have an impact on the trade balance of a country

  20. METHODOLOGY • Data types (Secondary) and Source • TB (imports/exports) Economic Survey, • Household consumption expenditure (IFS-IMF), • government expenditure (IFS-IMF),, • Foreign Direct Investment (UNCTAD), • Real exchange rate (proxied from nominal exchange rates) (IFS-IMF),, and • income from the rest of the world (IMF).

  21. METHODOLOGY Model Specification • Operational Dfn: TB = M/X (Bahman –Oskooss -1994) & Mulenga (2002) defn. • TB = f( RER, HC, G, Yw, FDI, )….. Brada et al. (1997) model,

  22. METHODOLOGY Variable Explanation • RER: To knock off the effect of NER & Inflation (PPP). RER (Devaluation) = M becomes expensive than X: Encourage X production = Improve TB • HC: Eco. Growth STD = C = M = TD • G: Same as above but GROWTH not “must” • FDI: M content = capital & intermediate goods. SR net effect is –ve due to production lag, and LR effect = +ve • Yw: As Yw they will import more from Tz. • Dummy= Trade liberalization (+ve or –ve) depending on trade sector performance

  23. METHODOLOGY Hypothesis • Real exchange rate impacts positively on the trade balance. • Private consumption has a negative impact on trade balance • Government expenditure is negatively related to trade balance. • FDI impact positively on trade balance. • Real income to the rest of the world has a positive impact on trade balance. • Trade police reforms have impacted positively on the trade balance.

  24. EMPIRICAL ANALYSIS • GENERAL OBSERVATION • R2 = 0.77 • F – Statistics = test of explanatory power of the variables • F-Statistics (6, 26) is 14.59 • Standard F at 5%: = 2.43 • Since 14.59 > 2.43 the variables are significant in explaining the model

  25. EMPIRICAL ANALYSIS Analysis of individual parameter • TB = 0.46G-0.34HC+0.0079FDI+0.247Y -0.13RER-0.467DM-2.84 • Results did not match exactly with the hypothesis • HC and G are the main variables and statistically significant at 5%. Other variables are statistically insignificant • Contrary to the hypothesis: RER = Worsening TB, BUT insignificant factor: Meaning currency devaluation is not the solution to promoting exports. Industrial base and Quality matters • FDI had the right sign but the impact is insignificant as much of the so-called FDI currently is in the form of imported capital equipments and no much has been produced for export so far. • Y: Right sign (+) but insignificant

  26. Analysis of individual parameter EMPIRICAL ANALYSIS • HC: Support the hypothesis that high income = high demand = high import = widening trade deficit • In reality, goods of foreign originality (cars, electronic equipments, etc) have flooded the local market • Trade liberalization: Statistically significant though TB worsened. • REASONS: trade liberalization introduced after a long period of import compression often leads to an increase in the demand for foreign goods . The country experienced surge inflows of consumer goods like second hand clothes, cars, TV, Radio etc. There was also an increase of capital and intermediate goods following the initiative by Tanzania investment center to attract FDIs • G+: Statistically significant and in favour of G • CAUTION: Need sensible gov’t intervention/investment and reduce expenditure on non-priority areas (luxurious goods, military eqpn’t)

  27. POLICY RECOMMENDATIONS • Raise tariffs on imported final goods. • Discourage imports of some goods; increase domestic production • Increase savings to finance domestic investmentto improve industrial base. (G ? or TAX ? Opp. Cost) • Improve domestic production capacity. Development of HR and Infrastructure • Proper management of the exchange rate(Devaluation doesn’t work??) • Selection and application of appropriate trade policy instrument.

  28. SUGGESTION FOR FURTHER RESEARCH • Variables used are not exhaustive • Variables like • terms of trade; • capacity to produce for export and • Trade in Service Might need further analysis

  29. CONCLUSION • The paper intended to determine the root course of trade deficit in Tanzania which persisted since 1970s. • Different researchers from different countries have pointed out several variables as the main cause • From the findings of this study and under the guidance of the previous studies, I have found out that the main contributing factors for the case of Tanzania are government expenditure, and private consumption. • Policy instruments such as trade liberalization and protectionisms also impacted on the TB

  30. DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002 Thank You FOR LISTENING

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