Transcript DETERMINANTS OF TRADE BALANCE IN TANZANIA 1970-2002

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
Presented to
JJ/WBGSP Scaling Up Program, Nairobi
Kenya
by
MBAYANI SARUNI, Economist, Ministry of
Planning, Economy and Empowerment - Tanzania
On
May 11, 2006
DETERMINANTS OF TRADE BALANCE IN
TANZANIA 1970-2002
Background to the study
External trade environment and domestic policies have a
great impact on trade and economic growth
Since independent (1961), Tanzania has pursued diverse
economic policies aimed at improving trade and enhance
economic development
Domestic policies involved included
exchange rates;
tariff structure,;
export taxation;
import control;
foreign exchange allocation systems; and
adjustment policies to external policies.
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
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
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
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.
DETERMINANTS OF TRADE BALANCE IN
TANZANIA 1970-2002
Background Cont……..
Export Performance
► 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
DETERMINANTS OF TRADE BALANCE IN
TANZANIA 1970-2002
Background Cont……..
Trade Balance
2500000
2000000
1500000
Mil. Tsh
1000000
500000
0
1970
1975
1985
1990
1992
1993
1994
1995
1996
1998
-500000
-1000000
IMPORTS
EXPORT
TRADE BALANCE
Year
1999
2000
2001
2002
DETERMINANTS OF TRADE BALANCE IN
TANZANIA 1970-2002
Problem Statement
Tz. has never experienced trade surplus since 1970’s
Macroeconomic reforms & various policies/strategies
were 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
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
►
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,
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
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
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
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
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
TRADE AND ECONOMIC OVERVIEW
Liberalization and Globalization
►
►
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
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
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).
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,
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
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.
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
Variable
Parameter/
coefficients
P-Value
Ts-standard
Level of
Significance
Decision
/Tc/ statistic
RER
a1
0.62
0.543
1.706
0.05
Accept HO
HC
a2
2.12
0.044
1.706
0.05
Reject HO
G
a3
2.38
0.025
1.706
0.05
Reject HO
FDI
a4
0.13
0.895
1.706
0.05
Accept HO
YF
a5
0.80
0.428
1.706
0.05
Accept HO
DM
a6
2.70
0.012
1.706
0.05
Reject HO
CONS.
0
0.64
0.530
1.706
0.05
Accept HO
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
►
EMPIRICAL ANALYSIS
Analysis of individual parameter
►
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)
►
►
POLICY RECOMMENDATIONS
►
Raise tariffs on imported final goods.
 Discourage imports of some goods; increase domestic production
►
►
►
►
Increase savings to finance domestic investment to
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.
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
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
DETERMINANTS OF TRADE BALANCE IN
TANZANIA 1970-2002
Thank You
FOR LISTENING