Value chain distortions in Tanzania

Since the 1990s, the Tanzanian government has striven to transform the country into a semi-industrialized economy supported by productive commercial agriculture. To accomplish this goal, policymakers pursued a policy of trade liberalization and reduced government intervention, including the agricultural sector. As a result, Tanzania has experienced a moderately high agricultural sector growth rate of 4.1 percent per year over the last two decades; this rate is comparable with neighboring countries including Kenya (4 percent growth per year) and Uganda (3.2 percent).

Despite these positive growth rates, however, crop and livestock productivity in Tanzania remain low and poverty remains high. Since agriculture still supplies 80 percent of employment and 30 percent of GDP in the country, improving productivity and increasing efficiency along the agricultural value chain clearly plays an important role in reducing poverty and improving well-being and overall economic development. A new IFPRI discussion paper examines how different policies targeting the agricultural sector impact producer incentives and price transmission at different nodes of the value chain (such as at the farm gate and border), in order to better understand how to effectively and inclusively promote value chain development that can benefit smallholder farmers.

The study specifically looks at two crop value chains in Tanzania: maize and groundnuts. The analysis uses nominal rates of protection (NRP; a measure of the difference between the domestic price and a reference “free market” price that would exist without government intervention) and national- and regional-level price data at different points along the selected value chains. NRPs are computed by adjusting the international reference price, assumed to be free from domestic agricultural policy distortions, for distribution, storage, transport, and other marketing costs to make it comparable to the domestic price. This difference offers a measurement of the degree to which policies distort incentives to farmers and traders. The analysis thus measures the effect of sector-specific and national policies on agricultural incentives for maize and groundnuts at the national and regional levels.

Tanzania is both a net importer and a net exporter of maize, depending on the year under study. In the maize value chain, which includes both maize and maize flour, border NRPs show an anti-trade bias in both scenarios. When maize is imported, those imports face tariffs (resulting in a positive NRP in most net-importing years); when maize is exported, exporters are taxed (negative NRP in most net-exporting years). The NRPs at the farm gate are negative in all years, despite the trade status and trade regime, demonstrating that producers are being taxed by domestic agricultural policy. In years when Tanzania is a net importer, import tariffs provide support to maize farmers, but these policies are not enough to protect farmers from the disincentives in the domestic maize market. In years when Tanzania is a net exporter and faces export taxes/bans, the disincentives in export market reverberate through the value chain and hurt farmers by lowering the prices they would have received otherwise.

Border NRPs for the groundnut value chain, which includes both groundnuts and groundnut oil, are negative regardless of whether Tanzania is a net importer or exporter. These negative rates mean that Tanzanian groundnut exporters receive less for their product than world market prices, implying structural problems in the groundnut export market, thus constituting a disincentive to sell groundnuts on the global market. In addition, farm gate NRP prices are also negative. This suggests that the disincentives seen in border prices trickle down to the domestic market, negatively impacting groundnut farmers as well.

In the value chains of both commodities, farm gate prices and NRPs for each region studied show significant variation. This finding also suggests that regional and/or state-level policies and other broader market inefficiencies (such as high margins received by middlemen and wholesalers at the expense of farmers) have an impact on farm gate prices and thus on farmers’ welfare.

Finally, the study also finds that both the maize and the groundnut value chain in Tanzania have underdeveloped processing sectors, as well as underdeveloped trade of processed outputs like maize flour and groundnut oil. This means that producers, processors, and traders are all missing out on potentially lucrative opportunities to create and sell higher value products.

While Tanzania’s agricultural sector has seen steady growth over the past two decades, much remains to be done in terms of improving and increasing market efficiency to ensure that policies do not inadvertently disincentivize agricultural production or processing. Policymakers need to examine and understand the entire agricultural value chain to sustainably and effectively increase agricultural productivity and drive future economic growth.

By: Sara Gustafson, IFPRI

Photo credit: Oxfam International