TDP in Tanzanias Textile sector: Missing Impacts or Links

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TDP in Tanzanias Textile sector Missing
Impacts or Links?

• Abridged from TDP-CUTS Case Study on Tanzanias
  Textile Sector
• Josaphat Kweka
• George Kabelwa

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OUTLINE

• INTRODUCTION AND TDP FRAMEWORK
• TRADE LIBERALISATIN AND PEFORMANCE IN THE
  TEXTILES SECTOR
• ANALYSIS OF WINNERS AND LOSERS
• LABOUR MARKET EFFECTS
• COMPLEMENTARY POLICIES
• CONCLUDING SUMMARY

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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)

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

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Cont

• Why focus on Tanzanias 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

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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

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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
• Trade is pro-poor
• The poor are able to participate in trade
• Market institutions exists and are pro-poor
• The conditions for trade performance are
  favourable.

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

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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 SOEs
• Recognition of private sector as the engine of
  growth

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Macroeconomic performance
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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

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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

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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

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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

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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

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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

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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

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Transporters

• Pass prices to Ginneriess, middle men, and
  factories
• Linked in the chain by Ginneries, Middlemen and
  factories
• Benefited from Liberalisation

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Ginneries

• Most affected by quality and production
• Connect farmers to transporters, exporters,
  factories
• Informants and market agents
• Have mostly BENEFITED

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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

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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

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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

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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

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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

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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

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Liberalisation has had severe impacts on textile
workers

• NoteElasticity of employment is measured as
  increase in jobs from a unit increase in output

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5. COMPLEMENTARY POLICIES

• Benefits of liberalisation wont 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

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6. CONCLUDING SUMMARY

• Effect of liberalisation the good thing about
  bad thing or bad thing about good thing?
• It cant be worse than the collapse of the textile
  sector, effects radiate across and become net
  loss to those without options
• AGOA, EBA, GSP and RTAs all are welcome
  initiatives whose performance have not matched
  that of 1970s Tanzania

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THANKS FOR YOUR ATTENTION