TDP in Tanzania’s Textile sector: Missing Impacts

or Links?

Abridged from TDP-CUTS Case Study on Tanzania’s Textile Sector

Josaphat KwekaGeorge Kabelwa

OUTLINE

1. INTRODUCTION AND TDP FRAMEWORK

2. TRADE LIBERALISATIN AND PEFORMANCE IN THE TEXTILES SECTOR

3. ANALYSIS OF WINNERS AND LOSERS

4. LABOUR MARKET EFFECTS

5. COMPLEMENTARY POLICIES

6. CONCLUDING SUMMARY

1. INTRODUCTION

Recent debate on Trade and Development hinges on efficacy of trade in poverty reduction

Trade has assumed a significant position in PRSP processes in the last 5 years

The argument is that trade is as source of growth, which is the basis of poverty reduction (winters et al 2000)

The recent Integrated Framework DTIS (2005) summarizes the evidence on

Tanzania

1990-1995 1996-2000 2000-2003 1990-2003

Private Consumption 1.6 3.9 2.7 3.1

Government Consumption

-0.5 1.5 1.5 0.8

Investment -0.8 0.6 2.3 0.5

Export of Goods and Non-factor Services

2.5 0.6 4.3 2.2

Import of Goods and Non-factor Services

1.5 -0.1 4.8 2.0

Statistical Discrepancy

0.4 -2.6 0.4 -0.8

GDP at market prices 1.8 4.1 6.4 3.8

Cont…

DTIS confirms that trade contributed about 60% of the 3.8% average annual GDP growth(1990-2004)

However, it has had no significant effect on poverty reduction! Why? Is it missing impacts or linkages?

The objective of the TDP project is to identify TDP linkages and short term impacts of trade

Cont…

Why focus on Tanzania’s textile sector? With investment capital of over US$ 500,000 in the 1980s, the sector was:

• Pro-poor, 1/largest employer (about 40,000)• 3rd largest source of government revenue• largest exporter of manufactures• Cotton is the 2nd largest export crop after coffee

Significantly long supply chain

Trade intensive (cotton/textile, garments) with access to numerous trade concessions

Typical failure case of trade liberalisation…

Conceptualisation of TDP framework and its application

The linkage between Trade and poverty is not straightforward

Conceptual framework is necessary to simplify the causal links so as to enhance analysis of impacts

Our emphasis is on income poverty, mainly through the labour market effects

Cont…

Two main mechanisms for Trade to link with (income) poverty reduction:

Trade can impact poverty directly Trade can impact on poverty indirectly through

growth

In either case some strong assumptions exist:i. Trade is pro-poorii. The poor are able to participate in tradeiii. Market institutions exists and are pro-pooriv. The conditions for trade performance are

favourable.

The following figure summarizes the hypothesized causal links between Trade and Poverty

Trade Policy

Reduced internal barriers to production

Reduced internal barriers to exchange

Rationalized tariff structure and hence increased government revenue

Enterprises Increase output Increase earnings/wages Increase employment

Distribution Reduce prices

Government pro-poor expenditure Better social services Better economic services

Reduce income poverty Reduce non-income poverty

Household Reduce overall poverty

International Trade Opportunities

Application on the Textile sector

We explore these links by examining to what degree the labour market effects in the textile sector have been the result of structural factors, trade policy and performance of the sector (sector-based approach)

Gathered information from in-depth review of secondary info and diagnostic interviews with selected informants

We have examined complimentary policies that promote TDP linkages in the sector

2. TRADE LIBERALISATION AND PERFORMANCE OF THE TEXTILE

SECTOR

Substantive part of macroeconomic reforms in Tanzania:

Massive trade liberalization

Move away from centrally planned to market oriented economic policy

Privatization of SOE’s

Recognition of private sector as the engine of growth

-4

-2

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2

4

6

8

GDP

and

per

cap

ita

inco

me

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20

30

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infla

tion

GDP Growth Per Capita Income Inflation

Macroeconomic performance

2.2 performance of the textiles sector since liberalisation

Four key conclusions: Textile and cotton amongst worst hit by trade

liberalization; net effects generally negative

Lack of complementary policies in addition to structural constraints

Different actors are affected differently (more than others) depending on their position in supply chain

Despite several trade initiatives, textile exports have continued to fall (to record lows) while imports have surged

Number of mills declined conspicuously following liberalization

Increased from 4 in the 1960s to 35 in the 1980s, and then fell to about 7 in the 2000s

0

5

1 0

1 5

2 0

2 5

3 0

3 5

N o . o f M i l l s

1 9 6 0 s1 9 8 0 s2 0 0 0 s

Trends in Production

Growth, stability, decline but fluctuations post liberalisation

Causes? Notable institutional and policy changes in addition to the structural constraints affecting production, marketing and pricing of cotton

Cotton Marketing Channels

Liberalisation replaced a public monopoly with a private monopoly (e.g. ginneries)

Lack of effective regulation has led to low quality, lower price to farmers and hence low production

Cotton marketing channels in Tanzania

Cotton Producer prices Positively reflects production trends but with less

fluctuations

Constant prices imply that profitability has been declining due to a notable rise in input prices

Trend in the Cotton Producer Price

0

50

100

150

200

250

TS

hs p

er

Kg

Source: Tanzania Cotton Board

Producer prices a fraction of world prices

The gap has widened in four fold since 1990s: why? Likely to narrow in 2000s High transaction costs, but also financing of Boards Lack of an effective price transmission mechanism

Price Gap Between Producer Price and Export Price

Source: Tanzania Cotton Board

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1000

1200

Ta

nz

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ian

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Pe

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Producer Price Export Price

3. WHO ARE THE WINNERS/LOSERS, WHY?

Cotton farmers Key players and

bearers of sector policies, taxes, transaction costs and production constraints.

Linked in the chain by the Ginneries/Coops and policies.

NET LOSERS

Transporters Pass prices to

Ginneriess, middle men, and factories

Linked in the chain by Ginneries, Middlemen and factories

Benefited from Liberalisation

Ginneries Most affected by

quality and production

Connect farmers to transporters, exporters, factories

Informants and market agents

Have mostly BENEFITED

Textile mills/factories Bearers of structural and

production constraints

Victims/beneficiaries of trade and investment policy/regime

Production costs are passed to consumers and workers

Linked to Ginneries and consumers (internal and external markets)

LOSERS from liberalisation and orphans of policy

Workers Basic agent for adding

value. Affected by industrial policy, factory practices and wage/welfare policy

Usually fight a loosing battle (unrests, unions)

Linked in the chain by factories and labour laws

NET LOSERS

The Government Poor policies, no

production, no taxes, no welfare

Search for optimum policy: Protection (industry) vs. liberalisation (trade)

Liberalisation is good, but done badly/carelessly

Globalisation forces abound, gov LOST the industry, tax/welfare

4. IMPACTS ON LABOUR MARKET

TDP linkage through labour markets

Important forces are: structural effects, demand and supply sides of labour

For LDCs, comparative advantage is in unskilled labour, but competitive advantage requires skilled labour

Labour intensive industry in a country with low wages and high unemployment

Structural effects Policy shift from traditional (agriculture) to non-

traditional (e.g. mining) exports

Shift from formal to informal employment (retrenchment, SMEs)

Increased rural-urban migration facilitated by conflicting policy objectives (EP, ASDP)

Institutional shift from public to private institutions (diminishing role of coops)

Shift in employment policy from permanent to short tenure

Labour Market effects Result from production costs and

competitive pressure

Marked decrease in: labour demand (low formal empl. & wages) employment elasticity (less lab-intensive) job security (more short tenure).

One of the frontier AGOA-EPZ mills (NIDA) closed down due to labour unrest

Liberalisation has had severe impacts on textile workers

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40

60

80

100

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Share of permanentw orkers

Share of textile in mfgempl

Empl elasticity in Text Salary share of income Share of other payments

1990-1994 2001-2004

Note:Elasticity of employment is measured as % increase in jobs from a unit increase in output

5. COMPLEMENTARY POLICIES Benefits of liberalisation won’t occur automatically,

need complementary policies

Need to be accompanied by compensatory policies

Neither were designed by “recipient” country – now curing (PRSP) rather than preventing

The list is huge, but priorities include infrastructure (accessibility), regulatory framework, extension services, access to finance, access to utilities and favorable fiscal and industrial policies.

Finally, effective social safety nets are required, especially to vulnerable actors

6. CONCLUDING SUMMARY1. Effect of liberalisation: the good thing

about bad thing or bad thing about good thing?

2. It cant be worse than the collapse of the textile sector, effects radiate across and become net loss to those without options

3. AGOA, EBA, GSP and RTAs all are welcome initiatives whose performance have not matched that of 1970s Tanzania

THANKS FOR YOUR ATTENTION