Welfare Effect of Cereal Export Bans in the United Republic of Tanzania

WELFARE EFFECT OF CEREAL EXPORT BANS IN THE UNITED REPUBLIC OF TANZANIA Mesia Ilomo University of Dar es Salaam Business School, United Republic of Tanzania [email protected] Abstract The aim of this paper is to examine the consumer welfare effect of cereal export bans in mainland Tanzania. The focus of the research is on maize which is the most widely consumed cereal in the country which also accounts for a substantial share of cereal exports. Maize was the main target of cereal export bans over the past two decades. As existing research on the issue has provided mixed results, this paper complements it by looking in greater detail at the impact of the bans on different regions of the country. Regions are categorized into East African Community (EAC) border regions and peripheral regions depending on their level of integration into the EAC which is the main export market for Tanzanian maize. Drawing on data from the 2007 Household Budget Survey of the Tanzania Bureau of Statistics and price data from the Ministry of Industry and Trade and the Food and Agriculture Organization of the United Nations (FAO), the paper runs a series of regressions. The first one aims to determine whether the transmission from international to domestic prices is affected by the level of integration into the EAC market. The regression shows that the level of price transmission is high in regions bordering the EAC and limited in regions far from the EAC border. The subsequent regression at the regional level seeks to establish the effect of the export ban on domestic prices. The findings indicate that all regions are affected by the export ban, but to different degrees and in different directions. The export ban was associated with an increase in prices in most EAC border regions and a decrease in prices in most peripheral regions. Finally, a non-parametric regression estimates the welfare effect of the export ban on maize in Tanzania. At the national level, the ban led to a household welfare loss of approximately 1.5 per cent, with female- headed households suffering more than male-headed households. The welfare loss was slightly higher for the poorest households. Analysis at the regional level indicates significant variations of the welfare effect across regions: consumers in most of the EAC border regions lose from the export ban, while those in most peripheral regions experience a welfare gain. These findings partly support the conclusion by Dabalen and Paul (2014) that consumers suffered a welfare loss following the introduction of the export ban in Tanzania. Additionally, they show the heterogeneity of the effect of the export ban in Tanzania, which can be partly explained by the fragmentation of domestic markets. Regional-level analysis indicates no significant difference in the welfare effect attributed to the export ban between female- headed and male-headed households. Findings in this paper contribute to the debate about the appropriateness of non-tariff measures in trade policy. In particular, they support a conclusion that export bans are not always beneficial for consumers, which goes against the expectations that policymakers have when they introduce such measures. The paper also provides additional insights, particularly regarding the heterogeneous effects of policy measures, which might encourage targeted interventions that are location-specific. The author would like to thank Cristian Ugarte, Julia Seiermann, and Vlasta Macku from the UNCTAD Virtual Institute for their comments on this paper, and David Einhorn for editing the text. The paper was prepared with financial support from the One UN Fund for Tanzania and the government of Finland. 1 1 Introduction The United Republic of Tanzania is a member of two regional blocs, the East African Community (EAC) and the Southern African Development Cooperation (SADC), both of which aim to promote trade among their member states by, among other measures, eliminating all forms of barriers, including non-tariff barriers.1 Tanzania has regularly imposed export bans on food, including bans on exports to EAC partner states, in order to ensure the availability of food and stable prices of cereals in the country (Kagira, 2011; Diao et al., 2013). This policy has aimed to protect consumers against increases in prices, but has been contested by producers and some policymakers who believe that a better solution would be to increase production, taking advantage of Tanzania’s favourable climatic conditions. The literature shows mixed findings with regard to the effects of export bans on grain consumers in Africa. Some authors (Diao et al., 2013; Kagira, 2011) find that the effect is positive, even though marginal, while others such as Woldie and Siddig (2009) find no evidence that export bans benefit consumers of cereals. Dabalen and Paul (2014) find that consumers suffered a welfare loss following the introduction of the export ban in Tanzania. This paper therefore aims to contribute to this debate while taking into account the geographical characteristics of the domestic market in Tanzania. Statistics indicate that Tanzania mainly exports cereals to East African countries which account for three-quarters of the country’s total cereal exports. Most of the exports are transported via roads. Tanzania is a large country with a fragmented domestic market, which makes it difficult to transport produce from production areas to markets. For example, the distance by road from Rukwa (a region in the southern highlands that is a key producer of maize) to Arusha (a region in the north near the border with the EAC) is 1,348 kilometers. Given that cereals are mainly transported by road, the location of the market is likely to affect price transmission and hence the welfare effect of an export ban on consumers. Tanzania has a tropical climate with some regional variations. Temperatures in the highlands range between 10oC and 20oC during the cold and hot seasons, respectively. In the rest of the country, temperatures rarely fall below 20oC. Tanzania is considered an agricultural economy, with 80 per cent of the population in rural areas engaged in agriculture. The agricultural sector is dominated by smallholder peasants, each of whom cultivates an average of 0.9 to 3 hectares, mainly rain-fed and cultivated using hand hoes (Makame, 2013). The sector provides employment for most Tanzanian women, accounting in 2006 for 80 per cent of the country’s female employment.2 Due to climate change, rainfall-dependent agriculture is increasingly confronted with low productivity and variations in production levels. Tanzania has more arable land (approximately 46 per cent of its territory) than other EAC member states, and strategic use of this resource could take advantage of the market potential available in the SADC, EAC and 1 The member countries of the EAC are Burundi, Kenya, Rwanda, United Republic of Tanzania, and Uganda. The member countries of the SADC are Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, United Republic of Tanzania, Zambia, and Zimbabwe. 2 According to World Bank estimates, the share of agriculture in female employment (80 per cent) was higher than the share of the agriculture in total employment (77 per cent) in 2006 (World Bank, 2015b). 2 the Tripartite Framework countries.3 Regional integration could thus be seen as an opportunity for farmers to gain better access to regional markets. Between February 2002 and June 2014, Tanzania had four rounds of export bans – from July 2003 to January 2006, from August to December 2006, from January 2008 to October 2010, and from May to October 2011. Export bans on staple crops,4 a measure imposed by the Department of National Food Security, were a controversial policy measure used in the Tanzania up to 2012 when they were abolished following the commitment made by Tanzania’s President Hon. Jakaya Mrisho Kikwete in bilateral consultation with President Hon. M. Kibaki of Kenya at the G8 Summit in the United States (Makame, 2013). The president’s decision was crucial to honouring Tanzania’s international commitments, such as the commitment to promote trade among EAC member states and the commitment to trade liberalization, including the pledge to the World Trade Organization (WTO) not to impose any new trade barriers. Export bans on food were introduced in Tanzania when production fell below the level of domestic demand. These measures were introduced on the assumption that unrestricted exports of food lead to a limited supply of food in the domestic market, thus causing an increase in domestic food prices. Consequently, it was assumed that export bans on cereals would increase the availability (supply) of cereals in the domestic market and eventually lead to lower and more affordable prices for consumers (Woldie and Siddig, 2009). Another reason for export bans, particularly in Tanzania, was to address the unethical behaviour of some intermediate traders who buy cereals from producers – and particularly from financially constrained households – at lower prices before the harvest, depriving producers of the opportunity to get higher prices in export markets (Kagira, 2011). Export bans discouraged traders from buying cereals from farmers because they were denied access to foreign markets where they could attract a higher price. An alternative was to export informally, but that involved additional costs such as bribes (Makame, 2013). In the absence of private traders, producers sold their produce to the National Food Reserve Agency (NFRA), often at a price lower than the price in international markets. The NFRA, a government agency under the Ministry of Agriculture, Food Security and Cooperatives, has the mandate to maintain an optimal level of food reserves in the country in order to address local food shortages and respond to emergency food requirements. The expectation of the government was that nothing on the export ban list would be exported, but the evidence has shown otherwise (MAFAP, 2013), including evidence showing that the export ban was associated with increased informal trade (Makame, 2013).

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