Tanzania - Agriculture sector memorandum (Vol. 2 of 3) : Main report

Report No. 1 2294-TA Tanzania Agriculture Sector Memorandum (In Three Volumes) Volume II: Main Report July 29, 1994 Agriculture and Environment Operations Division Eastern Africa Department Africa Region FOR OFFICiAL USE ONLY Docuient of the 'Norld Bank This document has a restricted distribution and may be used by recipients only in.the performance of their official duties. Its contents may not otherwise be, disclosed without World Bank authorization  TANZANIA AGRICULTURE SECTOR MEMORANDUM ABBREVIATIONS AND ACRONYMS ASMP Agriculture Sector Management Project CBS Central Bureau of Statistics ERP Economic Recovery Program FAO Food and Agriculture Organization FSAC Financial Sector Adjustment Credit GDP Gross Domestic Product IDA Intemational Development Association IMF Intemational Monetary Fund LART Loans and Advances Realization Trust MDB Marketing Development Bureau MOA Ministry of Agriculture NALERP National Agricultural and Livestock Extension Rehabilitation Program NALRP National Agricultural and Livestock Research Rehabilitation Program NGO Non-Governmental Organization WMC Nat anal :.Lmlling Corporation PPMB :roje Preparation and Monitoring Bureau PS.A C Pub,lic Sector Adjustment Credit UNJDP United Nations Development Program  FOR OFFICIAL USE ONLY PREFACE This report is a collaborative effort between the Government of Tanzania and the World Bank. It draws on the studies undertaken for the Agricultural Adjustment Program of 1990, on papers commissioned during 1991 and 1992, an Agricultural Diversification and Intensification Study financed by ODA, completed in September 1992, and recent Mid Term reviews for the donor-supported Agricultural Research, Agricuitural Extension and Tree-Crops projects. The review process was initiated formally in March 1992 by the Government and the Bank with assistance from the donor community, and seeks to assess constraints to growth and formulate development policy for the agricultural sector. A joint Government/Bank mission assembled during October and November 1992 to review studies, assess field activities, and draft a first statement of development priorities. Direct support for this effort was provided by ODA, FAO, Finland and Ireland. The mission concluded with a week long seminar on agriculture policy with participation from Government agencies, donors and the private sector. To sustain the participatory process, the preliminary conclusions of the joint report were reviewed with the Government at a technical level in July, 1993. A formal review of the Green Cover report was held in October 1993. Since the main mission in November 1992, the Government has acted on many of the policy recommendations made at that time. Significant changes in policy include the unification of the official and the market exchange rate in August, 1993, which removed the implicit tax on agricultural exports, and the passage of a law, also in August 1993, which allowed the private sector to enter the processing and marketing industries in coffee, cotton, cashews and tobacco. Fertilizer subsidies were discontinued in the 1994/95 Budget. These policy changes have been reflected in the text, and in a matrix auat..hed to the executive summary. The report provides an overview of agro-ecological characteristics, the rural household, and the institutional framework which together determine Tanzania's agricultural development prospects. Section I sets the stage with a brief review of agricultural growth since the late 1960s, identifying the sector's performance under different policy regimes. The macroeconomic framework is described with a brief assessment of its effect on agricultural growth. Section II describes the natural resource base, land use, and the nature of the rural household, drawing on a recent Poverty Profile to identify disadvantaged regions and characterize the rural poor. Tanzania has a very diverse geography and ecology. Population density and agricultural potential vary considerably across regions. The implementation of a development strategy will differ by region. To clarify the constraints and opportunities available across the country, and to assist in identifying concrete actions in the implementation of the proposed strategy, a review of the rural population and infrastructure density by region is presented. Section III provides an assessment of the Government institutions, farmer cooperatives, and other enterprises which support agricultural development, identifying new roles and priorities as the framework for economic management is restructured to foster competition amongst private enterprises in the provisiQn of services to agriculture. In 1986, the process of adjustment was accelerated with rapid devaluations, various measures to increase private sector participation in the economy, and an agreement with the World Bank, the IMF and other donors on a substantially enlarged financial assistance program. Section IV starts with an assessment of the results of adjustment on agricultural production. Following a review of market prospects for Tanzania's produce, an in-depth review of key subsectors is This document has a restricted d&Arbution and may be used by recipients only in the peformae of teir ofcial duties Its contents may not othermise be disclosed vnthout World Bank authonzaton.  ii undertaken, to provide a more thorough understanding of the constraints to growth, and the detailed measures needed to revitalize the agricultural econom) In Section V, the report attempts to fit the characteristics of ihe various subsectors, the constraints to development and growth opportunities described in Section IV, to the Govermment's objectives for the sector. Thus, it is shown how a focus on re-establishing profitability for traditional export crous can address not only the foreign exchange constraint the country lives under, but also addrt s poverty alleviation concerns. Similarly, facilitating the intensification of cu;tivation can have important positive effects on rural family incomes, and diminish environmental concerns of increased pressure on lands of marginal agricultural potential. The process of intensification, coupled with a liberalized foreign investment policy, and a restructured financial system will permit the gradual diversification of agricultural exports into high value products and non-traditional goods. A coherent policy of land and natural resource management (addressing tenure definition, assessment and location of regional areas of good potential, judicious location of infrastructure) can have important effects on rural incomes as well as mitigate concerns regarding mismanagement and loss of topsoil, and expansion into marginal areas where agriculture is unsustainable. Sirmilarly, a nationwide policy on water management, coupled with the rehabilitation and improvement of smalifarmer traditional irrigation schemes will reduce conflicts on water use for purposes of agriculture or power generation and raise rural incomes at minimum cost. Also in Section V, the report recommends Government interventions in the short and medium term, to support agricultural development. A short term program aimed at reversing price distortions and recuperating losses due to inefficient processing and marketing industries would focus on: (i) revitalizing the export processing industries, and (ii) continuing to reduce Government participation and control in produce marketing and input supply mechanisms for the sector. In the medium tenn the report recommends measures to: (i) improve the Governments ability to understand and influence the market-determined incentive structure for agricultwual production and processing, enhance competition in liberalized input and product markets, and at the same time, manage the country's natural resources to sustain productivity and minimize negative environmental consequences; (ii) improve the functioning of markets for the land, capital and labor elements of the agricultural production process, and (iii) induce technological change by improving the efficiency of markets that supply improved agricultural inputs, and by increasing the effectiveness of the Government's agricultural research and extension services. The final Section VI provides a brief review of the potential role of Government in supporting and investing in agricultural development. Following an assessment of the performance of the Bank's previous projects in the sector, the report provides a list of potential areas and priorities for Govermment and donor collaboration in projects and programs.  TANZANIA Agriculture Sector Memorandum Table of Contents I. AGRICULTURE AND THE MACROECONOMY ..........................................1 A. Sectoral Growth .............................................2 B. Agricultural Exports and Imports .............................................6 C. Summary ............................................ 12 II. THE RESOURCE BASE AND THE RURAL POPULATION . ........................................... 13 A. Natural Resources ............................................ 13 Agro-ecological Zones ............................................ 13 Fanning Systems ............................................ 16 Land-use ............................................ 17 Area Under Cultivation ............................................ 18 Assessment of Potential Area for Cultivation ............................................ 20 B. Land-use and the Environment ............................................ 24 Forests ............................................ 26 Wildlife ............................................ 29 Water and Irrigation ............................................ 30 Water Resource Management ............................................ 30 Irrigation Development ............................................ 34 Land Tenure ............................................ 36 Land Legislation ............................................ 40 A. Proposal for Tenure Reform ............................................ 41 C. The Rural Household ............................................ 44 D. Rural Poverty and Food Security ............................................ 46 Food Security ............................................ 48 AIDS and Agriculture ............................................. 50 Rural Women ............................................ 50 E. Regional Characteristics .51 F. Rural Labor Markets ................................. 55 G. Summary ................................. 56 III. AGRICULTURAL SERVICES ....................................... ......... . 57 A. Government Funding for Agriculture Services . 57 Reform of Agricultur Parastatals . 60 Institutional Development in Agricultr . 61 Agricultural Research . 63 Agricultural Extension ............................. 66 B. Fanner Cooperatives ............................. 68 Cooperative Unions ............................. 70 The Cooperative Act ............................. 71 C. Supply of Agricultural Inputs ............................. 74 Chemical Fertilizers ............................. 75 Sources of Fertilizer Supply ............................. 78 Financing Fertilizer Imports ............................. 78 The Demand for Fertilizer ............................. 79  iv Distribution Channels ................................................ 3 Other Agrochemicals ............................................... 83 Environmental Effects ............................................... 84 Certified Seeds ............................................... 85 Veterinary Drugs, Vaccines, Chemicals and Equipment ......................................... 86 Agricultural Equipment and Machinery ............................................... 87 Animal Traction ............................................... 88 Policy Recommendations on Inputs Supply ............................................... 88 D. Rural Finance ............................................... 89 Institutions ............................................... 91 Smallholder Lending Initiatives ............................................... 93 The Financial Sector Crisis ................................................ 93 The Banking Reforms ................................................ 94 The Future of Rural Financial Markets ............................................... 95 Actions Required ............................................... 96 E. Rural Infrastructure ............................................... 97 F. Summary. ............................................... 99 IV SOURCES OF GROWTH ..................................................... t00 A. Market Prospects for Tanzania's Agricultural Produce .................................................. 100 International Markets and Prospects for Traditional Agricultural Exports ..................................................... 100 Regional Markets ..................................................... 103 Domestic Markets ..................................................... 104 B. Diversification and Expansion of Exports ..................................................... 104 Comparative Advantage and Export Competitiveness ............................................ 104 Crop Returns ..................................................... 106 Supply Response in Agriculture ..................................................... 107 T ie Effects of the Economic Reform Program ........................................... 107 Empirical Analysis ..................................................... 112 C. Technological Change ..................................................... 114 D. Traditional Export Crops ..................................................... 117 Coffee ..................................................... 117 Marketing and Processing Efficiency ..................................................... 120 The Exchange Rate and the Interest Rate .................................................... 121 TCMB and Cooperative Union Debt ..................................................... 121 Improving Research and Extension Effectiveness, and Reducing Costs of Production ..................................................... 122 Cotton ..................................................... 123 Marketing and Processing Efficiency ..................................................... 126 Market Exchange Rate and Interest Rates .................................................. 126 Union Indebtedness and Financial Restructuring ....................................... 127 Improving Research and Extension, and Improving Farm Level Profits ..................................................... 128 Cashew nuts .....................................................1 28 Strategy for Cashew Sector Reform ..................................................... 130 Tea ................................................................... 131 Strategy for Tea Sector Development ..................................................... 132 Sisal ..................................................... 133  v A Development Strategy for Sisal ............................. 134 Sugar ............................. 134 A Development Strategy for Sugar ............................. 137 Food ............................. 138 Management of the Strategic Grain Reserve ............................. 143 Trade in Food ............................. 14S Non-Traditional Agricultural Exports .147 Transport .147 Flowers and Foliage .148 Fruits and Vegetables .149 Constraints to Growth .150 Lessons from the Kenyan Experience .151 Oilseeds .151 Strategy for Development of Nontraditional Agricultural Exports .152 Livestock .153 Cattle .153 Sheep and Goats .155 Poultry and Pigs .155 Hides and Skins .155 Government Services for Livestock .156 Market Potential .156 Legislatioi . 157 Fodder and Water Management .157 Disease Control .158 Breeding .158 Inputs Supply ............................................................................................... 159 Livestock Development Strategy ..................... 159 C. Summary ..................... 161 V. AN AGRICULTURAL DEVELOPMENT STRATEGY ...162 A. Previous Sectoral Reviews .162 B. Government Policy Statements .164 C. Adjustment Programs .166 The Economic Recovery Program .166 Tanzania Agricultural Adjustment Program .166 D. Lessons from this Review .167 Smallholder Supply Response .167 Expansion in Area Cultivated .167 Roads Make a Difference .168 Agro-ecological Information Base .168 Decline in International Commodity Prices .168 E. Constraints to Agricultural Growt .169 Thae Government Dominated Economy .170 Inefficiency of Traditional Public Services .171 F. An Agricultural Development Stategy .171 The Interaction between Agriculture and Other Sectors .172 The Nature of Future Agricultural Growth 73 Short Term Strategy .174  vi Foreign Exchange Valuation for Agricultural Exports ............................... 174 Revitalization *.f Agricultural Export Industries ......................................... 175 Curtail Government Participation in Commercial Activities Related to Agriculture ................................................... 175 Medium-Term Strategy ...................................................7 76 Government Management of Sectoral Incentives ....................................... 176 Strengthening Markets for Factors of Production ....................................... 177 Technology Generation and Natural Resource Management ..................... 179 G. Environmental Impact of Agricultural Growth ................................................... 183 Soil fertility mining and degradation" ...................................................1 183 Contamination of Ground and Surface Water ................................................... 184 Encroachment on Reserves .................................................... 185 H. Poverty Alleviation ................................................... 185 VI IMPLICATIONS FOR PUBLIC EXPENDITURE IN AGRICULTURE . ........................ 187 A. The Bank Portfolio ......................................................... 188 B. Donor Funded Projects ......................................................... 188 Policy Based Lending ......................................................... 189 Investment Lending ......................................................... 190 This report is a joint effort of the Government of Tanzania and the World Bank. It was prepared following a joint mission to Tanzania in October and November 1992. The Government Task Force for the review, under the general direction of Mr. W. Ngirwa (CPM-MOA), was led by Mr. P.M. Lyimo (MOA), and included Mr. E.T.K. Luyangi, and Mr. E.M. Sikana (MLHUD), Dr. E.C. Ndisi (BOT), Mr. J.M. Madika, Mr. R.R Makusi, Mrs S. Kaduma, Mr J.S. Mawalla, Mr A.O. Farahani, Mr. A.L. Ngondo, Mr. DR. Mbwele, Mr. O.N.E Shuma, Mr. D. Urasa, Mr. E.J. Lujuo, Mr. J. Crees, Mr.T.E. Banda, Mr. D.A. Kajumulo, Mr.A. Lamosai, Dr.M.L. Ngutter, Mr. I.N.L. Kaduma, Mr. E.L.K. Bubelwa, Mr. N.S. Mwasalyanda, Mr.Mdadila, and Mr. Uledi (MOA). The Bank team was led by Mr. J. Coates and included Mr. R. Noronha, Mr.M. Mayfield, Dr.N.S. Shetty, Mr.K.M. Agarwal, Mr.A. Finney, Mr.R. White, Mr.R. Southworth, Mr.MJ. Hebblethwaite, Mr.J.P. Srivastava, Mr.R. Gray, Mr. W. Van der Geest, Mr. J. Grindle, Mr. F. Byamugisha, Mr.D. Gustafson, Mr.R. Kettering, and Mr.H. Porvali. The report was prepared by Mr. J. Coates and edited by Ms M. Hileman. The work was carried out under the supervision of Ms. S. Ganguly, Chief, AF2AE. The Peer Reviewer was Mr. G. Donovan, the Lead Economist was Mr. P. Miovic and the Department Director, Mr. F. X. Colaco.  1. AGRICULTURE AND THE MACROECONOMY 1.1 Agricultre is the foundation of the Tanzanian economy, supporting employment, food production and exports. Some 84 percent of the employed populatien work in the agricultural sectorl, producing 61 percent of both GDP and merchandise exports2. Tanzania's 3.5 million farm families work small holdings, where the area cultivated averages 0.9 hectares. Some 93 percent of all farmers cultivate less than 2.0 hectares.3 In 1992 average GDP per capita was estimated at US$ 1104, making Tanzania one of the poorest countries in the world. 1.2 Food crop production dominates the agricultural economy totaling 55 percent of agriculral GDP5 as noted in Figure 1.1. Livestock accounts for another 30 percent, and the traditional cash crops (coffee, cottn, cashewnuts, sugar, pyrethrum, tea, tobacco, sisal) for only 8 percent. Fishing and hunting contribute 6 percent and forestry 1 percent of agricultural GDP.6 Figure 1. 1 Shares of Agriculture GDP, 1989-917 Forestry Hunting/Fishing 30% Foodaops 55% 8% 1 ILO, "1990/91 Labour Force Survey Tabulations", Table M-l. Of tbese, 54 pent are female and 46 peent male 2 Based on official data, three year average. 3 URT, Bureu of Statistcs, AgricultWrl Sample Survey of Tanzania Mainland, 1989/90, Table 9. 4 World Banlk, World Development Report 1994, p. 162. There are indications that official GDP staistics do not capture much of the economic activty wiuch takes place in the informal sector. Inclusion of this "second ecooomy would increase total GDP estimates by a minimum of 45 percent (maliyarakono, T.M., and Bagachwa, MgS.D., "Tbe Second Economy in Tanzania", Eastern Afican Studies, James Curr, London, 199CJ. S At curent prices. In 1976 prices however, livestock was only 13 percent of agriculture GDP in 1989-91, with crops accounting for 76 percent This indicates a substntal shift in the price of livestock output relative to crops, which is hard to find evidence for. 6 URT, Bureau of Statistics, "National Accounts of Tanznma 1976 - 1991", Table 10.1 and mission estimates. 7 Based on Mission estimates. National Agriculture GDP data not broken down by subsector.  2 A. Sectoral Growth 1.3 Economic development in Tanzania was slowed in the late 1970s and early 1980s by a process of social change which included a shift toward state control and operation of productive enterprises. Even the smaliholder family farm, the mainstay of Tanzaian agriculture, was affected by policies supporting collectization and the systematic relocation of people into villages. Data on GDP show a slowdown in the .ates of growth in output and productivity in these years, followed by a period of rapid change, starting in 1984, and accelerating following a series of reforms initiated in 1986. A recent World Bank review of the Tanzanian economy8 identifies four different policy regimes since 1966: (i) From 1966 through the mid-1970s, Tanzania experienced growth as controls increased following implementation of the socialist policies of the Arusha Declaration of 1967. (ii) From the mid-1970s through the early 1980s, there was a period of economic decline and slow growth caused in part by extenal factors: the oil price shocks of 1973 and 1979 and the war with Uganda of 1979-80, and in part by internal factors: the nationalization of industrial, financial and trade concerns; structural reforms in the smaliholder sector; and the lack of attention to incentives for output and productivity growth. (iii) In the early to the mid-1980s a series of changes in economic incentives were attempted, but failed for lack of a comprehensive approach to address the strucuture of ownership and competition in the industrial and trade sectors of the economy. (iv) From start of the Economic Recovery program in 1986 to the present has been a period of gradually deepening reforms within the macroeconomic environiment; a withdrawal of parastaal monopolies in trade and processing; an improvement in the competitive environment and increased attention to production and processing incenives; all of which has opened the doors for sustained growth. 1.4 Following the assessment in the Country Economic Memorandum of 1991, performance in the agricultural sector is evaluated here for each of the periods noted above. Real growth in agricultural GDP9 har paralleled total GDP growth from 1966 through 1992. Agricu averaged 2.8 and GDP averaged 2.7 percent per annumwn. The similarity is misleading; there have been sharp divergences between growth in agriculture and GDP (see Figure 1.2). Growth in agriculture lagged significantly behind GDP duing the initial penod of increased Govemment intervention in the economy: agricultural growth was 45 percent lower than the GDP rate in 1966-75, and 65 percent lower in 1976-80. In the early 1980s, the bottom of the general economic decline, agrculture had acLally started to recover, even while GDP growth was negative. Agriculture growth has led the economy through the periods of reform and economic recuperation from the early 1980s responding rapidly to the earliest reforms in the marketing of agricultural produce. World Bank, Report No. 9352-TA, "Tanzania - Towards Sustainable Development in the l990's-, June 11, 1991, pages 1-9. 9 Unless mentioned specifically, all trend growth rates are average amnual exontial rates, calculated using the least squares method. 10 In 1976 prices.  3 Figure 1.2 Real Growth in GDlP and Agriculture GDP (1976 prices) 6.00% 5.00%- 4.74% ffi ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4.17%/ ,! 4.00% ~3.73% 3.00% 1.0000 2.11% 2.07% 10 2.00%Y- ,1.00%. 1111 | 0.00%-_ *v1-1--- + 1 . L 1966-75 1976480 1 3 1984-45 1986-92 -1.00% .0.91% | GDP U ApicGm GDP 1.5 The normal process of structural transformation and the gradual decline in the share of agriculture which accompanies the shift of resources into higher-valued output was slowed, and then reversed in Tanzania in the late 1960s and early 1970s. As the Figure 1.3 indicates, from the late 1960s on, agriculture's share of the econony remained at 40 percent. With the onset of the agriculture-led reform program in the mid-1980s, agriculture increased its share of output to around 60 percent, the status it used to occupy in the early 1960s. While this may indicate that the economy is poised to support anotfie push in the non-agricultural sectors, it is still too early to withdraw fron support for agriculture sewtor grwth.. The lead role assigned to agriculture in the process of economic recovery reflects national development objectives. Growth in agriculture is, at this time, the most effective means of generating more foreign exchange, alleviating poverty and achieving food security. An agricultural supply response can best be achieved by increasing attention to production incentives, and providing institutional and infrastructural support for the agricultural sector. An, shifts in economic priorities towards the development of industry and services should ensure that agriculture does not lose the support necessary to continue its expansion.  4 Figure 1.3: Shar of Agriculture in GDP (Current Prices) and Agriculture GDP (Constant Tsh Millions) 65% 16,000 60% Share 14,000 12,000- 50% 10,000 40% Ag. GDP j 35% -6, 30% I I I I I I I I1 I I I I I I I I I I I 1 I I I - 4,000 1960 1964 1968 1972 1976 1980 1984 1988 1992 1.6 Average GDP growth for the whole economy since the mid-1970s has been below the population growth rate. Between 1967 and 1978 the population grew at 3.3 percent per annum, vs. 3.6 percent per annm for GDP. Population growth slowed to 2.8 percent per annum between 1978 and 1988 (census years) and GDP grew only at 1.7 percent per annum. As a result, GDP per capita fell during the early 1980s, and is only now beginning to rise to the levels enjoyed in the early 1970s. As Figure 1.4 shows, real mcome per capita, evaluated using various deflators, is not much higt:br than it was in the mid-1950s, although it appears, using the GDP deflator, that per capita GDP has improved substantally since 1986. Figure 1.4: Real GDP per Capita, Deflated Using Various Indices. 12,000 6,200 6,000 10,000 5,800 s,000 5 -,600 - -5,400 -5,200 4,000 - - - - 5,000 ------- Low Inc. Price Index 4,800 2,000 1985 GDP Defator 4,600 0 - I i I II -I I I I I I - 4,400  5 1.7 The nature of growth in agriculture is analyzed below. Within agriculture GDP the crop subsectorl , which accounts for 65 to 75 percent of agriculture production, has maintained a steady growth rate. Despite the changes in social and economic policy, growth in output has been between two and three percent per annum. This is similar to the rate of population growth in rural areas, and is to be expected in an agricultural economy based on subsistence farming where an estimated 40 percent of food consumption comes from home production. As Figure 1.5 indicates, annual average growth rates for livestock and the other sectors occasionally have been negative under the various policy regimes, until the period of in-depth reform began in 1986. Following the initiation of the Economic Recovery Program, the non-crop production sectors began to respond to improved demand and production incentives. Figure 1.5: Average Annual Growth Rates in Agriculture by Sector, by Period, 1976-1991 10.0h/ . 0' 60y X X0% 40% 37/ 0% ^w25%23 0.0%/ .R -2W.0X 4.0% -3.3% t 6.0%A -5.6Y |E C0om lI i,eft* I Fsrey U Hmfo 1.8 Crop production is the largest subsector in agriculture, contributing around 63 percent to agriculture GDP. Its seemingly stable performance masks severe fluctuations in production and growth by type of crop. These fluctations have foliowed the pattern induced by various policy regimes. Cereal production, for example, the basic food crop, which accounts for some 28 percent of the value of present crop output, has seen its growth rate decline from 5.7 percent per annum in the penod 1976 to 1980, to 4.3 percentper annum between 1981 and 1985, to 0.2 percentper annumbetween 1986 and 1991 (Figure 1.6). (However, the very high growth rate in cereals production in 1976-80 is suspectl2). In 1984 and 1985 there was a surge in production of food and other crops, resulting from the liberalization of "own-fiuds Official data is not available on the breakdown of agriculture GDP. The mission has constructed its own version of the agriculture GDP series from 1976 through 1991, following the methodogy used in the CEM Details on these calculations are available in the Working Paper. References to elements of the agriculture GDP are based on mission estimates. 12 See argument in van den Brink, Rogier, 'A Review of Agricultural Statistics of Mainland Tanzenia, June 1992, Southern Africa Department, pp 27 and 28, where he points out that the rapid growlh in food production posited between 1975 and 1980 is not consisteut with independent observations of prices in open food markets import data, health data, caloric ntake data and rates of technology adoption. These point to continued gradual growth during the late 1970's and early 1980's.  6 imports", and the reappearance of"incentive" consumer goods on the shelves in rural areas13. Starches, a subsistence foodcrop which includes cassava and potatoes, is cultivated in the South and other areas not suitable for maize. It contributes some 33 percent to the value of crop output, and has continued to grow at between 2 and 3.5 percent per annum. Growth rates in the production of oilseeds, pulses, and fruits and vegetables, all preferred crops with somewhat higher income elasticity of demand, have responded vigorously to the gradual import liberalization of the early 1980s, as well as to further st4ps to free up local markieting and promote exports in the late 1980s. Exporters of oilseeds and fruit and vegetables were allowed to retain a portion of their foreign exchange earnings, increasing their attractiveness. Export crops are the most easily affected by changes in policy framework. For srnallholder fanrrers, production of cash crops, expecially in difficult times, will be a residual use of resources after meeting domestic food needs. As the market economy contracted in the late 1970s and early 1980s and consumer goods became scarce, the attractiveness of "cash crops' diminished considerably, whatever the price. Figure 1.6 shows a dramatic reversal in the growth rates of the plantation and export crops (mainly coffee, cotton, cashews and tea) folHowing the initiation of reforms in the trade and foreign exchange regime in 1986. A negative growth rate of -7.9 percent in 1981-85 changed to a positive growth rate of 2.4 percent per annum during the period starting in 1986. Figure 1.6: Average Real Annual Growth by Subsector, Within Agriculture GDP 12.1% .9 10.0% - 8 | ~~5.1% 5.6% *5.2% .. 5.0% - .* 3.7% 4.3%36 3% a 2.8% 198 ~~ ~ ~ ~~~~48 fl= _5.0%- . t. _ . 1 -~~~~~~~~~~~~~~~~~7.9% -10.0% 0 cuolt a d pub= Elponuta M oibed& ftnyw7etb M B. Agricultural Exports and Imports 1.9 Export crop production declined between the mid-1970s and the mid-1980s because of the disincentives created by domestic policies. This trend, combined with the decline in the international prices for traditional agricultural export crops, has caused the value of Tanznia's exports to drop dramatically over the past 25 years. Betwen 1965 and 1991 the real value of all merchandise exports has declined at an average annual rate of 4.5 percent per annum. Over the same period the real value of total imnports grew at about 0.7 percent per annum. As Figure 1.7 indicates, the value of all imports has exceeded 13 see Bevan, D., Collier, P., and Gunning, J.W., "Peasants and Goverments - An Economic Analysis", Clarendon Press, Oxford, 1989, pp 153-222, and World Bank, -Tanzania -Economic Report - Towards Sustainable Deveiopment in the 1990sn, Report 9352-TA, June 11, 1991, pp 66-67  7 exports since 1970. Since then the trade deficit has widened with the rapid growth in import demand which accompanied economic reform since 1986, driving the deficit to its maximum value in 1991. The value of all merchandise imports is now three timies the value of exports. Figure 1.7 Total Merchandise Exports and Inports, in 1985 US dollars, Deflated by the G-5 MUV. 1000.0 9, 00.0 .g 600.0 400.0-- j200.0 1965 1967 1969 1971 1973 1975 1977 1979 1911 19S3 1985 1917 1989 1991 1.10 The export sector has been very responsive to the policy climate. During the period of gradual socialization of the economy (1965-79), the real value of merchandise exports14 declined at a trend rate of -1.4 percent per annum, while imports continued growing at over 4 percent. During the period of fill sociali7ation and partial reforms (1980-1985), exports declined rapidly at -14 percent per year, with imports also going down at almost -5 percent per annum. Later, when the incentive policies towards export agriculture adopted under the Economic Recovery Program began to have an impact, the decline in exports was arrested. Trend growth in the real value of exports has been zero since 1986. This represents a significant achievement, since the net barter terms of trade"s for Tanzania have declined by 25 percent during the same period. 1.11 The net barter terms of trade for Tanzania have declined significantly since the mid-1980s (Figure 1.8). The drop in international prices coincided with the initiation of the economic reform progrm, maing adjustment more difficult. The barter terms of trade index has dropped by 41 percent since the height of the most recent coffee boom (1985). A key feature ofthe economic reform program inied in 1986 has been the devaluation of the currency, induced in part by the deterioration in trade conditions. There have been drastic reductions in the real effective exchange rate since 1986 (Figure 1.8 ). While devaluation provided some impetus to exports, its supply and income effect in rural areas was muted by the lack of adjustnent to farmgate prices. The gains from the devaluations were taken by the export processing and marketing industries wuhich remained monopolies in the hands of cooperative unions or export marketing boards. Govermment continued to set fiumgate prices and processing margms at levels 14 In this case the FOB value of merhandise exports deflated by the 0-5 MUV (Manufacture Unit Value) l1dex- This index reflects the US dollar value of manufcur exported from USA, France, Gmay, UK and Japan, weighted proportonally to the countnes' exports to the developing countnes. Tlhis is also known as the net income terms of trade: value of mercandise exports divided by the index of import prices. is Net barter tenas of trade: index of export pices divided by index of import pnces.  8 which favoured the processing industies. Only in the early 1990s was fanmgate pricing liberalized, and 1he first steps taken to introduce competion in export crop marketing and processing. Figure 1.8 Real Effective Exchange Rate Index (1985 = 100) and Net Barter Terms of Trade Index (1985 = 100) 100.00- 100 90.00 90 a E 80.00 Toms of Trade 70.00 eV 60.00 ~50ioo 701 40.00 30.00 4 x X X60 30.00 X 20O0- REER 50 2 10.00 0.00 I I I I I I I I I l I I 40 1979 190 1981 1982 1983 1984 1985 1986 1987 1988 1989 19 1991 19 1.12 The sharp decline in the real value of imports between 1980 and 1985 cut deeply into the availability of the raw materials, consumer goods and machinery needed to keep econonic growth alive. The slowdown which this produced was an important event, catalyzing the decisions that led to reform and recovery in the middle and latter part of the decade. The agriculture sector memorandum of 198316 put a srong emphasis on the constraint to production posed by insufficient foreign exchange for imports that were vital to the functioning of the agncultural economy. The recent county economic memnorandum'7 has argued that the increased availability of consumer goods due to the changes in the foreign exchange regime in 1984 caused a one-time increase in production mcentives, and was partly responsible for the incresed output from agriculre that has ocwurred since then. In 1986, however, imports started to grow rapidly again increasing at a rate of 3.2 percent per year, thanks to the increased availability of donor import finance. 1.13 The composition of exports has shifted as export policies and commodity prices have changed. Tradtional agricultural exports (coffee, couon, tea, cashewnuts, sisal, tobacco and pyrethrum) have been a fall-back mechanism for generating foreign exchange. lhe country is capable of producing and exportng a wide array of products in additon to these traditional rvport crops. The share of traditional exports is a barometer of how well the non-traditional export economy is faring. In the late 1960s traditional agriculure accounted for only 50 percent of exports. Its share rose as high as 71 percent in 1984-86 befre declining in 1989-91 to 46 percent of the total, but with a nuch lower real value (Figure 1.9) than in the late 1960s. Given ha the population has more than doubled since the late 1960s, and the economy is twice as large, the real decline in the value of exports is an alrming phenomenon. The real value of traditional agricunlral exports had also declined dramatically from its peak in 1974-76. Thus the divsification and expansion of export capacity must rank very high on the list of national economic priorities. 16 World Bank, Report No. 4052-TA, "Tanzmia-Agriculture Secw Report-, August 19, 1983. 17 World Bank, Report No. 9352-TA, op. cit  9 Figure 1.9 Traditional Agricultural Exports (US$ millions of 1985, Deflated by G-s MUV) 1CO.0- 684 6S8 "6o.0 569 ao0.0 - S 400.0 - ___ 50% 325~~60 200.0-46 J100.0 0.0 s -- 1969-71 1974-76 197941 1984-6 198991 i Tm AgiAc1A e 0 OtIw Ex ot 1.14 Coffee continues to play an important, although declining, role in earning export revenue. The nominal value of coffee exports was high in 1986, and had declined substantially by 1991. Cotton exports have grown signifivaty in value since the mid-1980s, as has the value of non-traditional agricultural exports (Figure 1.10). Figure 1.10 Traditional Export Crops, and Their Share In Total Exports US$ 537 US 37 US 394 _ 100% 90%A 380% X 0% 10% 19B1 1986 1991 O e {~~~~~~~~~~~~~3 OTea Cal wNuts ml OtAhrnurme O Mmuireem wdO11w Expote 1.15 The physical volume of exports of traditional agricultural crops was static during the 1970s and early 1980s, with the exception of sisal and cashewnut exports, which declined sharply. The volume of cofife exports remained fairly stable over the years, between 40,000 and 60,000 tons. Cotton lint exports peakd in 1966 at just under 100,000 tons, gradually declined to a trough of about 25,000 tons in 1985,  10 before climbing back up to the 90,000 ton level in 1991. Sisal suffered a dcamatic decline, from some 210,000 tons in 1965 to under 5,000 tons in 1991 due to changes in the ownership of the industry, and a decline in intarnational demand. Cashew nut exports rose to over 150,000 tons in the early 1970s, with Tanzania accounting for nearly 30 percent of total world production. By the mnid 1980s however, exports of raw nuts had fallen to under 10,000 tons per year, with the collapse in production caused by disruptions to smalholder fanming systems and marketing mechanisms. Despite a large buildup in processing capacity, only small quantities of cashew kernels were exported. Following the reforms of the mid-1980s, including currency devaluations; increases in producer prices; and the gradual liberalization of export marketing and other incentive policies, export volumes of coffee, cotton, tea, and tobacco started to go up. Figure 1.11 Trends in Export Volume for Coffee, Cotton and Tea (in '000 metric tons) 100 --2 90 80 2 (70 AL 20 5~~~~~~~~~~~~~~~~~~~~~1 10