Tanzania's cotton sector : constraints and challenges in a global environment

Africa Region Working Paper Series Number 42 tS _~~~~~, TanzaMiL's Cotton Sector: Conistrain-ts andI Challeniges in- a Global Environment John Daffes December 2002 1~fl ai The World Bank 'wwu  Tanzania's Cotton Sector: Constraints and Challenges in a Global Environment Africa Region Working Paper Series No. 42 December 2002 Abstract Cotton is Tanzania's largest export crop prices, but official statistics show no after coffee. Most cotton is exported, evidence of a supply response. Ginning contributing $90 million to export earnings. capacity and marketing efficiency increased Labor is the major input: cotton provides considerably while the quality of cotton employment to 500,000 rural households. may have declined marginally. Use of other inputs is limited. Several issues still need to be addressed. Before 1990 most cotton marketing and The tax code could be simplified, and taxes trade were handled by cooperative unions substantially reduced. Taxes could also be and the Tanzanian Cotton Board. Reform consolidated and rationalized, making began slowly in 1990, with the biggest step taxation of export crops and merchandise coming in 1994 when the government exports more uniform. Better data are eliminated the monopoly held by the board needed, along with better dissemination of and unions and allowed competition in information. More investment in railroad marketing and ginning. The reforms service, Mwanza's road network, and increased the producer's share of export multiplication of the new seed variety would also help the sector. Authors' Affiliation and Sponsorship John Baffes Sr. Agriculture Economist, The World Bank E-mail: jbaffes@worldbank. org The Africa Region Working Paper Series expedites dissemination of applied research and policy studies with potential for improving economic performnance and social conditions in Sub-Saharan Africa. The Series publishes papers at preliminary stages to stimnulate timely discuission within the Region and among client countries, donors, and the policy research community. The editorial boardfor the Series consists of representatives from professional families appointed by the Region s Sector Directors. For additional information, please contact Paula White, managing editor of the series, (81131), Email: pwhite2(a),worldbank.ore or visit the Web site: http://www. worldbank. org/afr/wp,s/index. htm. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s), they do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they represent and should not be attributed to them.  Tanzania's Cotton Sector: Constraints and Challenges in a Global Environment John Baffes December 2002  Acknowledgments This paper is part of a larger effort by the Africa Region in collaboration with the Development Prospects Group to assess the performance and identify policy impediments of Tanzania's major export crops. The findings reflect field work carried out during March 5-16 and November 5-16, 2001. The views expressed here are those of the author and should not be attributed to the World Bank. The author would like to thank Karen Brooks, Philippe Chabot, Betty Dow, Peter Gibbon, Marianne Larsen, Donald Mitchell, Robert Townsend, and Carlos Valderrama for comments and suggestions on earlier drafts and is grateful for the valuable information obtained during interviews with Thomas Fille, Joe Kabissa, Peter Kapingu, Prem Kapoor, J. P. Sunga, and W. M. Walwa. The author would also like to thank the World Bank country office staff in Dar es Salaam, especially Ladisy Chengula and Gloria Sindano. Meta de Coquereaumont provided excellent editing.  Table of Contents 1. Introduction ..................................................................... 1 2. A Brief History of the Cotton Industry in Tanzania ....................................................1 3. Developments since 1990 .....................................................................3 Growers Receive Higher Share of Export Prices but Pay Morefor Inputs ..............................................4 Supply Response Has Been Limited .................................................................... 4 Credit Provision Collapsed and Input Use Declined ...................................................................... 5 Quality of Cotton May Have Declined .....................................................................6 Ginning Capaciht Increased and Marketing Improved ..................................................................... 8 The Research Station Released a Superior Cotton Variety ....................................................................8 The Textile Sector Collapsed. .................................................................... 9 4. Constraints and Challenges .....................................................................9 Infrastructure Is Inadequate .................................................................... 9 Taxation Is Too Complex and Taxes Are Too High ................................................................... . 10 The Cotton Board Has Too Many Roles-and Too Much Power .......................................................... 11 Organic Cotton Is Being Produced but Not Properly Marketed ................ .......................................... 12 Data Quality Is Unacceptable .................................................................... 13 5. Conclusion .................................................................... 14 NOTES ....... .............................................................. 15 Appendix A: The World Cotton Market .................................................................... 30 References ..................................................................... 47 List of Tables Table 1: Cotton Yields in Selected African Countries, 1970/71-2001/02 ........................................... 18 Table 2: Prices Received by Cotton Growers, 1988/89-2000/01 ......................................................... 19 Table 3: Quality Deterioration after 1994/95: Reasons, Qualifications, and Public Action ........... 20 Table 4: Tanzania's Cotton Premium over the A Index and Franc Zone, 1984/85-2001/02 .......... 21 Table 5: Post-Reform Ginning Capacity In The Lake Zone (Tons Per Month) ............................... 22 Table 6: Post-Reform Cotton Marketing Shares, 1994/95-1998/99 ................................................... 23 Table 7: Composition of Taxes on Cotton, 1997/98 and 1998/99 ....................................................... 24 Table 8: Principal Institutions Involved in the Cotton Sector ........................................................... 25 Table 9: Cotton Production According to Various Sources, 1986/87-1998/99 ................................ 26 Table 10: Prices Received by Cotton Growers According to Various Sources . . 27  Appendix Tables Table A 1: Global Balance of the Cotton Market (Thousand Tons), 1960-2002 .............................. 38 Table A 2: COTITON PRICES, 1960-2002 (US DOLLARS PER KILOGRAM) ................................. 39 Table A 3: Direct Government Assistance to Cotton Producers, 1997/98-2001/02 ......................... 41 Table A 4: Production and Area under Cotton in Uganda, Zimbabwe, and Tanzania, 1970/71- 2001/02 ......................................................................... 42 Table A 5: Total Government Assistance to U.S. Cotton Sector, 1996/97-2001/02(millions of U.S. dollars) ......................................................................... 43 Table A 6: Composition of the Cotlook A and B Indices (U.S. cents per pound) ........................... 44 Table A 7: Indicative Cotton Futures and Put Options Strike Prices and Costs ............................. 45 List of Figures Figure 1: Producer's Share of Cotton Export Price ......................................................................... 28 Figure 2: Tanzania's Premium over the A Index ......................................................................... 28 Figure 3: Post-1994 Cotton Marketing Chain in Tanzania .................................................................. 29 Figure A 1 Monthly Cotton Prices (US dollars per kilogram) ........................................................... 46 Figure A 2: Annual Cotton Prices (US dollars per kilogram) ............................................................ 46 Boxes Box 1: The Primary Society of Chma Cha Msingi Meudama ........................................................... 16 Box 2: Unions and the Private Sector-Perceptions and Reality ..................................................... 17 - Ui -  1. INTRODUCTION Cotton is Tanzania's largest export crop after coffee. It contributes about $90 million to export earnings and provides employment to about half a million rural households. Cotton is produced primarily by smallholders on farms of 0.5 to 10 hectares (the average is 1.5 hectares). Most cotton growers do not use fertilizer or other chemicals, mechanized (or even animal) power, or irrigation. More than 90 percent of cotton is produced south of Lake Victoria in the Mwanza, Shinyanga, Mara, Tabora, Kigoma, and Singida regions, with Singida, Mwanza, and Shinyanga accounting for 80 percent of it; the rest is produced in the Eastern part of the country.' In the last five years Tanzania's cotton output has averaged about 60,000 tons, 0.3 percent of world output of 20 million tons. Before the 1990s the Cotton Board and the cooperative unions handled all marketing services for the industry, including the provision of seed and other inputs. In reforms introduced in 1990 the Cotton Board provided fee-based service to the cooperative unions instead of buying the cotton itself. In 1992 price controls were relaxed, and indicative prices were announced instead of prices at which cotton was purchased. The biggest change came with the Cotton Act of 1994, when the government eliminated the monopoly held by the Cotton Board and the unions and allowed competition in cotton marketing and ginning. This paper examines the causes of the poor performance of the Tanzania cotton sector. It eValuates policy reform initiatives and explores alternative measures in the context of the world market. It also considers public sector investment opportunities for cotton. 2. A BRIEF HISTORY OF THE COTTON INDUSTRY IN TANZANIA Cotton was introduced to Tanzania around 1904 by German settlers as a plantation crop, but the attempt failed. During the 1920s new efforts focused on smallholder production, first in Eastern and later in Western Tanzania. Production of cotton on a commercial scale started at Ukiriguru, south of lake Victoria, following the construction of the railway line from Tabora to Mwanza in 1928. Because the first cotton varieties (imported from the United States) were not appropriate to local growing - 1 -  conditions, yields were low. Local research during the 1930s led to the development of a local pest-resistant variety. Cotton output, especially in Western Tanzania, rose considerably with the releases of these local varieties, along with better organization of the sector following establishment of the Tanganyika Lint and Seed Marketing Board in 1956.2 By 1966 Tanzania's cotton output was 80,000 tons, or 0.75 percent of world production of 10.7 million tons. A turning point came in the 1960s following the spread of the cooperative movement and deterioration of relations between ginnery owners (mostly Asians) and cotton growers. Several hundred primary societies had sprung up, and the groups began handling crop purchasing (see box 1 for the structure of a typical primary society.) Soon, they formed cooperative unions and began building ginneries, training staff, and taking over ginneries and cotton oil mills from foreign owners. The conditions of sale or transfer of ginneries are not clear, however. A government report (1999b, p. 13) put it as follows: Until the early 1960s, the ownership and management of ginneries in Tanzania remained in the hands of the private sector. Although, due to competing forces basically from primary societies and cooperative unions on the procurement and marketing of cotton, the private entrepreneurs were compelled to sell their ginneries to them. By 1968, almost all ginneries were bought by the cooperative unions thus not only controlling the ginning but also the sale of cotton in the country. Throughout the 1970s and 1980s, there has not been much changes on the ownership of the ginneries until the 1990s when government initiated the trade liberalization. By 1968 the unions and the Cotton Board had effectively been handed a monopsony in cotton seed buying and a monopoly in cotton lint selling. Not surprisingly, they soon became large bureaucracies and failed to pay adequate attention to the needs of the sector. The unions were employing an estimated 1,800 permanent staff and 7,000 casual laborers. The Nyanza Cooperative Union alone, with its 13 ginneries, -employed 776 permanent ginnery staff and 3,000 laborers; the Shinyanga Region Cooperative Union employed 560 permanent staff and 2,000 laborers (Government of Tanzania 1999b, p. 13). In an attempt to correct the inefficiencies and poor management, the government abolished the unions in 1976 and turned over cotton marketing to the Tanzanian Cotton Authority, the successor of the Lint and Seed Marketing Board. The government set the prices paid to farmers, establishing uniform national prices for an entire season. This marketing structure also failed, and the cooperative unions were reinstated between 1980 and 1984. The unions and primary societies acted as agents for the Tanzanian Cotton Marketing Board, the renamed Tanzania Cotton Authority. The primary societies stored and sold cotton to the cooperative unions for a fixed price, and the - 2 -  unions processed the seed cotton for a fixed margin. The Cotton Board managed domestic and international sales. Because the cooperative unions were semipublic entities, they simply added another bureaucratic layer rather than making a substantial contribution to value added. Most of the unions accumulated huge debts and managed to survive only through government subsidies and donor support. (Box 2 describes the problems the unions were facing.) Both production and yields suffered. Of African producers, only Uganda had lower yields than Tanzania (table 1). The evolution of the cotton sector is vividly summarized in an evaluation report by the Netherlands Development Cooperation (1994): A striking characteristic of the cotton sector in Tanzania has been its institutional instability during the pastforty years. Far-reaching institutional reforms have regularly been imposed. The histony of cotton sector institutions shows an almost constant struggle amongfourforces: cotton growingfarmers, cooperatives, private ginnery owners and the state bureaucracy. In addition, the ruling political party became involved in the struggle when it attempted to shape cotton sector institutions along ideological lines in the transition towards a socialist economy (p. 319) ... Infact, cooperatives became part of the political structure, and a network of bureaucrats, party officials and cooperative leaders cultivated their interests, usually to the detriment of the growers (p. 321). Five years after unions were fully reinstated it became clear that policy reforms were the only feasible solution. 3. DEVELOPMENTS SINCE 1990 The first steps toward cotton reform in Tanzania were taken in 1989/90, when the government launched the Agricultural Adjustment Program. The program transferred ownership of seed cotton from the Cotton Board to the cooperative unions, and the board was converted into a fee-based marketing service for final sales and input purchases. Price controls on cotton were gradually relaxed. In 1991/92 the government announced only indicative prices, not fixed prices. The cooperative unions were free to determine their own producer prices for the next season, although they chose to offer uniform prices throughout the country. The largest reforms came with the Cotton Act of 1994, when the government formally eliminated the monopoly held by the board and the cooperative unions and allowed competition in cotton marketing and ginning. At the time there were 14 regional cooperative unions licensed to trade cotton. In 1994/95 some 22 private companies started trading cotton, and 8 new private ginneries were constructed. That opened up another marketing channel, especially in Western Tanzania. In Eastern Tanzania, where production was low and some farmers had no buyers, the Tanzanian Cotton Lint and Seed Board (the new name of the Tanzania Cotton Marketing Board as - 3 -  of 1995) acted as buyer of last resort. By 1996/97 private businesses were purchasing almost half of all cotton. Private traders and ginneries were able to capture a considerable share of the market because they offered higher prices than cooperative unions and paid promptly. Some private ginneries also engaged in contract farming, providing inputs (seeds and occasionally fertilizer) to producers who agreed to supply cotton in return. The ginneries and producers usually established a minimum price at planting time, but the price could be adjusted if the market price was higher during the harvest.3 Growers Receive Higher Share of Export Prices but Pay More for Inputs A principal argument for policy reform in the cotton sector was the enormous gap between world prices and the prices received by Tanzanian producers. During the six seasons prior to the reforms, the average grower's share was 41 percent of the cotton export price (table 2 and figure 1). In the six seasons after the reform, the share was 51 percent. While a considerable improvement, it remained far below what Ugandan and Zimbabwean producers received following their own cotton sector reforms. Payments were made more promptly as well. Before the reforms, Tanzanian growers often had to wait as long as two years for payment. With inflation running at 20-30 percent a year, that meant that the value of their payments was at least halved by the delay. The reforms also meant that input prices increased considerably. The average cost of pesticides, for instance, rose from 1,600 Tanzanian shillings (Tsh) a kilogram in 1993/94 to Tsh 5,000 in 1998/99, implying a more than 25 percent annual increase in nominal terms (Kabissa and Myaka 2000). Supply Response Has Been Limited A lack of reliable data makes it difficult to analyze the impact of reforms on supply, but a simple comparison before and after the reforms using International Cotton Advisory Committee data indicates that cotton output doubled (from 43,000 to 94,000 tons) in the year following the reforms before gradually dropping back to pre- reform levels (table A3 in appendix A). Output averaged 64,800 tons in the five seasons before the reforms and 66,400 tons in the five seasons after the reforms, a very moderate increase. But other data sources throw even this modest increase into doubt. Three different sources show no supply response after the 1994/95 policy changes, which is consistent with the large reduction in input use and the mixing of cotton varieties that took place after the reforms. Different data sources aside, there is considerable variability in cotton production in Tanzania, where cotton is very price-responsive. A World Bank (1999) - 4 -  study found that cotton's short-run supply elasticity is unity, implying that cotton's price variability is fully translated into supply variability. This reflects the flexibility of farmers in switching back and forth between cotton and food crops. Credit Provision Collapsed and Input Use Declined Once input supply (mainly chemicals and seeds) and credit for purchasing inputs were no longer integrated into a single cotton marketing channel, use of inputs declined sharply.4 Loss of the single marketing channel pushed up the costs of marketing chemicals and led to a collapse in supply and distribution. And most farmers did not have access to credit and so could not afford to purchase chemicals at market prices. At least two credit provision schemes have been initiated to boost input use. In 1995 the government set up the Agricultural Input Trust Fund to stimulate private trader involvement in input supply and to finance purchases by the cooperative unions (Gibbon 1999). The fund provided credit at subsidized rates. Although some unions and private traders used the fund in 1995 and 1996, low credit recovery led to the fund's demise in 1997. In a second attempt the Cotton Board established the Cotton Development Fund during the 1999/2000 marketing season. A 3 percent levy on cotton exports is paid into a trust fund used to finance purchases of cotton seed (1.35 percent), chemicals (1.15 percent), and research and development (0.5 percent).5 The inputs are distributed to registered cotton producers at below market prices, with the fund making up the difference. The fund is a forced savings mechanism; no subsidy is involved. During its first season of operation, the fund paid about 75 percent of the price of inputs, producers 25 percent. In interviews industry representatives alleged that corruption was pervasive in the distribution chain and that substantial quantities of chemicals were diverted to the free market. Similar problems plagued seed distribution. Until the 1997/98 cotton season seed distribution was handled by the unions and primary societies, which were required to retain about a tenth of the seed for free distribution, while the rest was milled for oil. Once private traders took over, the quality of seeds deteriorated and growers received far less than the required 10 percent of seeds. After the reforms at least eight new oil mills were built in Western Tanzania, increasing the region's milling capacity by almost 50 percent. This intensified competition for seed, which is why traders distributed far less than the legally required 10 percent to growers. The Tanzania Cotton Association and Cotton Board are working to improve seed distribution and working of the Cotton Development Fund. 5  Quality of Cotton May Have Declined Quality deterioration is a complex issue, but there appears to be agreement that the quality of cotton deteriorated after the reforms (Government of Tanzania 1999a; Shepherd and Farolfi 1999; Gibbon 1999). Among a host of reasons (see table 3), four stand out. First, as already mentioned, input use declined considerably. In extensive field studies during the 1997/98 season Gibbon (1999) reported that procurement of insecticides by cooperatives in the Mwanza, Shinyanga, and Mara regions fell from 0.34-0.5 million liters during 1993/94-1995/96 to about 0.23 million liters in 1996/97 and 72,000 liters in 1997/98.6 Second, zoning was abandoned. Under zoning, seed for planting would come from seed cotton ginned in a designated ginnery, an attempt to keep pests and diseases from moving from one area to another. The construction of new ginneries and the fierce competition among new traders led to the abandonment of zoning, thus accelerating the transmission of disease and lowering quality. Third, following reform, the cotton varieties (UK87 with UK82) developed for use in the lake and southern zones became mixed, contributing to quality deterioration.7 And fourth, El Nifio and La Nifia caused considerable damage to cotton crops during the 1997/98 and 1998/99 seasons. The effects of two other factors sometimes put forward as causes of the decline in quality-the opening of new ginneries and the mixing of grades-are more ambiguous. While at least half the new private ginneries are of the saw type, which reportedly produces lower quality cotton, the other new roller-type ginneries produce higher quality cotton, so there should have been little net effect on quality.8 The effect of mixing grades is also unclear. Before the reforms cotton was marketed as either AR (high) or BR (low) grade. Following the reforms competition among new traders and excess ginning capacity led to the abandonment of grade separation, with most cotton marketed as AR. The fact that grading has not returned more than eight years after the reforms, however, implies that the market did not attach a significant premium to grade separation. There are also at least two factors pointing to an increase in quality. First, prior to the reforms cotton had to wait in storage for as long as a year before it was sold, leading to a deterioration in quality. Since the reforms cotton sales have been expedited, as evidenced by the shorter period of trading in Northern Europe, falling from an average of 36 weeks between 1984/85 and 1993/94 to 14 weeks following the reforms. Interviews with local industry representatives corroborated the increased speed of sales. Second, prior to the reforms a large share of cotton went to the domestic textile industry. Although not documented, it is likely that lower quality cotton was consumed domestically, while higher quality cotton was exported.9 Since the reforms most cotton is exported. So, although the quality of exported cotton may have declined on average, - 6 -  it does not necessarily follow that the quality of all cotton has declined. One quantifiable measure of cotton quality is the premium that Tanzanian cotton commands over the Cotlook A Index and its Franc zone component (see appendix A for details). In the seven seasons prior to the reforms Tanzania's premia averaged 10.0 percent over the A Index and 10.5 percent over the Franc Zone quotations. In the seven seasons after the reforms the premia fell to 8.8 and 7.9 percent- the 1994/95 season is not reported because Tanzanian cotton was not traded in sufficient volumes in Northern Europe that season. Extending the pre-reform period to 1984/85 gives an average premium of 10.6 percent over both the A Index and Franc Zone quotations. Regardless of the period used, the premia declined very little, which is consistent with only a small decline in quality. It is worth contrasting these numbers with the findings of the recent Cotton Sector Development Strategy of the Tanzania Cotton Lint and Seed Board (TCLSB 2002, p. 7): Tanzania was one of the biggest producers of roller ginned cotton (30%) for which it earned a premium of up to 6 U.S. cents per pound. Another premium of 7 US cents per pound was achieved due to its cleanliness as it is hand picked. Both premiums have now been lost but are achievable if corrections are instituted in its handling. Until 1993, another 2 cents per kg premium would also be achievable if cotton was delivered to the market in the third quarter of the year. The sad story to date is that Tanzania's cotton has lost all these premiums and it is actually discounted some 10 cents per pound due to the decline in its quality. Between 1984/85 and 1994/95 the Tanzanian component of the A Index averaged $1.63/kg while the A Index averaged $1.48/kg, implying a premium of 15 US cents. According to the Board's analysis, prior to 1993 Tanzania enjoyed a premium of 13 US cents per pound, equivalent to 29 cents per kilogram. Between 1995/96 and 2001/02 the Tanzanian component of the A Index averaged 1.57/kg while the A Index averaged $1.45/kg, implying a premium of 12 U.S. cents. The Board study, however, cites a 10- cent discount per pound, equivalent to 22 cents per kilogram. To summarize, while the Board's study claims that Tanzania's cotton went from a 29-cent premium to a 22-cent discount per kilogram-a 51-cent differential-the data reported in table 4 indicate that it went from a 15-cent premium to a 12-cent premium-only a 3-cent differential. The claim that market liberalization jeopardizes export quality has been made often in many different contexts. Gilbert and Tollens (2002) examined Cameroonian cocoa exports using monthly data from 1988 to 2001, analyzing the import unit values of cocoa imports into the European Union before and after reforms in 1994. They found no evidence of any significant quality problems arising from market reforms. Further, - 7 -  they concluded that "government does not need to regulate in order to ensure a normal commercial outcome ... [and] concerns about export quality should not be an issue in the continuing African market liberalization debate" (p. 29). Ginning Capacity Increased and Marketing Improved Before the reforms there were 34 ginneries in Tanzania, 31 of the roller type. During the first three years of the reforms 17 new private ginneries were built, 6 in Shinyanga, 6 in Mwanza, 4 in Mara, and 1 in Tanga. The new ginneries (eight of them of the saw type) were built because the cooperatives unions refused to allow private traders to gin their cotton on a contract basis, according to Shepherd and Farolfi (1999), or because the charges were prohibitive, according to a government report (1999b). The new private ginneries added some 16,967 tons of monthly capacity to the existing 19,148 tons of union capacity in the western cotton growing area (table 5). Capacity utilization was low in both the private and the union ginneries: 9,983 tons or 59 percent for the private ginneries and 6,471 tons or 34 percent for the union ginneries. A number of new cotton oil mills were also built. During the second year of reform the private sector took over more than a quarter of cotton marketing and as of 1997/98, the Board has withdrawn completely from cotton marketing (table 6). The private sector markets almost two-thirds of cotton, and unions the rest. Entry by private traders was not problem free. In the early years of the reforms cotton marketing was disrupted in many areas. Traders in remote areas, especially in the eastern cotton growing area, paid very little for cotton, in part because farmers were unaware of market prices and in part because of high transport costs. These problems have been rare in recent seasons. The Research Station Released a Superior Cotton Variety The Ukiriguru research station, under the Ministry of Agriculture and Food Security, conducts nearly all cotton research for the western cotton growing area. (Research for the eastern cotton growing area is carried out at the Ilonga research station in Morogoro; the station has released two important varieties, IL74 and IL85.) The Ukiriguru station developed and released two cotton varieties, UK77 for use in the northern zone (Kagera, Mara, and Mwanza) and UK82 for the southern zone (Shinyanga and Tabora). Because the varieties were developed for the specific agroclimatic conditions of each zone, cotton yields declined when the two varieties were mixed following the 1994 reforms. Mixing may also have affected quality (see above). Three years before the reforms the Ukiriguru station released a new cotton variety, UK91, which research data and interviews suggest is superior to both UK77 and - 8 -  UK82 releases and could result in higher yields."0 However, achieving the higher yields requires multiplication and release of enough UK91 to replace the older varieties and to forestall mixing with existing varieties. That, in turn, will require a concerted effort by the Cotton Board, the Ministry of Agriculture and Food Security, and the Tanzanian Cotton Association. The Textile Sector Collapsed Another important development that may have affected the demand side of the cotton industry was the discontinuation of support to the domestic textile industry and its eventual collapse. Tanzania's textile industry got its start in the early 1970s as part of the government's efforts to industrialize the economy. Domestic and donor-financed investment helped a number of textile mills begin operation, and by the 1980s there were more than 30 mills with an annual capacity of almost 50,000 tons of yarn. More than 80 percent of mnill capacity was under state ownership or control. At its peak the textile industry absorbed about a third of domestic cotton production. Though appearing successful, the textile industry was kept alive only through government protection and subsidies (Government of Tanzania 1999b, p. 5). Once government support came to an end, the industry was unable to survive international competition, and all but three textile mills went out of business. Attempts have been made recently, through privatization, joint ventures, and other means, to revive the industry, but it is too early to gauge the outcome. The U.S. African Growth and Opportunity Act, which allows many African countries (including Tanzania) greater access to the U.S. market, may be another incentive for revitalizing the textile industry. The Act is also expected to increase regional demand for cotton. 4. CONSTRAINTS AND CHALLENGES Despite the achievements to date several issues still need to be addressed. The tax code could be simplified, and taxes lowered. The state's involvement in the sector could be reduced in most areas, with the exception of seed multiplication. Better data are needed, along with better dissemination of information. Niche markets, such as organic cotton, ought to be pursued further. And on the investment side, transportation infrastructure, especially the railway system and the road network in Mwanza, must be improved. Infrastructure Is Inadequate By many accounts Tanzania's infrastructure is one of the poorest in the region. Most infrastructure investments ought to be assessed on an economywide rather than sectoral basis, with returns on investments in one sector compared with returns across -9-  all sectors. However, three infrastructure shortcomings severely impede the development of the cotton sector and ought to be dealt with at a sectoral level. First, because most cotton must be transported by rail, the quality of rail services is vital to sectoral performance. Greater efficiency in rail transport would lower costs to growers. Second, the road network in the Mwanza region, where most cotton is produced, requires considerable upgrading. As with rail transport road improvements will increase efficiency and reduce costs, thereby leading to higher producer prices. Third, some public investment may be needed to accelerate seed multiplication of the UK91 cotton variety. Taxation Is Too Complex and Taxes Are Too High Before the reforms cotton sector taxes were administered centrally by the Prime Minister's Office in consultation with the Ministry of Agriculture and the Cotton Board. Now cotton, like all other export crops, is subject to a host of taxes, levies, and fees administered at both district and central government levels. A government study of the tax structure in 1998/99 (Government of Tanzania 1999b) found that the tax burden on cotton was more than 13 percent of the producer price (7.7 percent for district taxes and 5.1 percent for central taxes). Local taxes include a produce assessment and education fund tax; central taxes include a Cotton Board application fee, export license fee, ginning license fee, Cotton Board fee, stamp duty, withholding tax, and export duty, for a total of 24.43 Tsh per kilogram, based on a producer price of 185 Tsh per kilogram (table 7). And there are still other fees, including the Cotton Development Fund fee and fees payable to cooperative unions and primary societies. When all fees and taxes are accounted for, the tax burden exceeds 20 percent of the price received by producers. In addition to these direct taxes on cotton, there are sector-specific or economywide distortions that impose an even larger burden on the sector. These costs have increased enormously in the last decade. Another government report (2000) found that nominal protection rates in the sector increased from -17.9 for 1986-89 to -69.0 for 1990-93 and -67.7 for 1994-99, with the negative sign indicating taxation of the sector. Most of the outflow of resources was a result of direct interventions.'" While the taxes and other levies are high, at least five studies claim that the full amounts are not being paid: * "There seems to be some skepticism among Unions and private buyers whether everyone is paying the required levies and cesses" (Akiyama and Larson 1995, p. 5). * "Unless they were systematically under-declaring their seed cotton purchases and/or - 10 -  otherwise avoiding taxation-they were entailing losses" (Gibbon 1999, p. 144). * "The data on exports as given by various private export firms are unrealistic and in most cases they are understated to avoid some levies and taxes imposed by various authorities" (Government of Tanzania 1999b, p. 25). * "Oppressive tax enforcement, harassment of taxpayers, and discontent with public service delivery seem to increase tax resistance and may explain widespread tax evasion" (Fjeldstad and Semboja 2001, p. 2059). * "Most importantly, lack of transparency and accountability with regard to how such taxes are utilized by concerned authorities has been irksome. As a result of taxes accounting for up to 20% of farm-gate price, there has been rampant underreporting of purchases or even more mundane ways of tax evasion have been crafted" (TCLSB 2002, p. 13). Although it is difficult to quantify these claims, that they come from such diverse sources adds considerable weight to the conclusion that tax avoidance or evasion is widespread. The Cotton Board Has Too Many Roles-and Too Much Power The Cotton Board has several roles. It regulates the industry, inspecting the quality of lint and other by-products; announces indicative prices; and collects and disseminates statistics. The board is supposed to certify the quality of seed cotton collected at all buying posts and to inspect the variety and quality of lint at the ginneries. A lack of adequate resources severely limits these inspections, however. In practice, ginneries send samples to the board from each bale of cotton ginned, and the board simply informs ginneries if samples are deficient. Cotton is seldom inspected at buying posts. In order to be more effective the Cotton Board hired a private company which placed inspectors at every ginnery in order to monitor the quality of cotton since the 2000/01 season. These inspectors were given the right to "reject" cotton. Not only it is not clear what "rejection" means, but the quality control scheme appears not to be functional at all while it is characterized by corruption. Interviews with ginners indicated that quality inspectors would "accept" or "reject" cotton on the basis of whether a side-payment of the equivalent of $US 30 per truck load had been made. By statute the board is supposed to "ensure free competition, fair trade, and to set and monitor indicative prices as established by market forces" (TCLSB 2002, p. 25). For example, for the 2002/03 season, the Board along with the Tanzania Cotton Association announced that the minimum price to be paid to farmers would be 140 Tsh -11-  per kilogram. However, this is a dangerous practice. If the prevailing price is above the "indicative" price, the announcement motivates traders to collude and refuse to buy cotton at the indicative price. On the other hand, if the prevailing price is much lower than the indicative price, farmers may view the indicative price as a guaranteed price and refuse to sell their cotton at the prevailing price. The power of the board also appears to be excessive. According to the 2001 Cotton Industry Act, "[The Board is entitled] to do anything or enter into any transaction which in the opinion of the Board is calculated to facilitate the proper and efficient carrying out of its activities and the proper exercise of its functions under the provision of this Act" (TCLSB 2002, p. 25). The Cotton Board should withdraw from interventions in the quality and price of cotton, which ought to be the sole responsibility of the private sector. The board's involvement in these practices simply adds one more unnecessary layer of bureaucracy. Instead, the board should focus on a few core activities, including the collection and dissemination of statistical data and seed multiplication. Organic Cotton Is Being Produced but Not Properly Marketed Several African cotton producing countries-Benin, Mozambique, Senegal, Tanzania, Uganda, and Zimbabwe-began to produce organic cotton in the late 1990s.12 Some are still at an experimental stage; others are more advanced. Although Tanzania seems well suited to the production of organic cotton, because of the low reliance on chemicals and fertilizer, inspection and certification are still at an early stage. In experimental trials farmers readily accepted and produced organic cotton, but the marketing side of the experiment was less successful. Organic cotton production in Tanzania began in the 1994/95 season. Managed by textile company CIC Limited, initial efforts involved 45 farmers who allocated 141 hectares to organic cotton. A Swiss company handled certification and supervision. Contract farmers were promised support through extension services, including provision of inputs, a guaranteed market at a premium price, and payment in cash. In the second season 110 farmers produced organic cotton on 645 hectares, harvesting 443 tons of seed cotton. While production was deemed a success (only three farmers dropped out in the first two seasons), internal problems and changes in the textile company's management delayed purchases of the cotton, which was eventually sold as conventional cotton, without the expected price premium. Despite the marketing failure, the number of registered farmers increased to 134 in the 1996/97 season, with the area planted rising to 778 hectares. Of the 516 harvested tons of fully certified organic cotton, only 60 percent - 12 -  was marketed as organic, this time by Tansales, Ltd., which took over when CIC, Ltd. went out of business. Data Quality Is Unacceptable The poor quality of data is a major concern, as the government acknowledged in its review (1999a): The [cotton] industny is also facing the problem of discrepancies of its data. Data from various sources on the same issue has been quite different. The sources of information on cotton usually are Customs, Bank of Tanzania, The Ministry of Agriculture and Cooperatives, and the TCLSB. The differences in the data could be eradicated or narrowed down through regular reconciliation by those institutions mentioned above. Table 9 gives a sense of the data problems. It reports four sets of data on cotton production between the 1986/87 and 1998/99 seasons: one from the International Cotton Advisory Committee (ICAC) and three from the government's cotton sector review (1999a, p. 19, table 10, which draws from TCLSB; p. 32, Annex 1, which lists no source; and the Annex 4 table Cotton Production since 1922, also from TCLSB). The deviations between the three sets of government data and the ICAC figures are revealing. For the 1992/93 season, for example, the government data on page 32 of the report are 118 percent higher than the ICAC figures and the data from annex 4 are 101 percent higher. Trying to gauge the degree of supply response by comparing pre- and post-1994 averages would yield results ranging from a 15 percent reduction (annex 4 data), through reductions of 8 percent (page 19 data) and 4 percent (page 32 data), to an 8 percent increase (ICAC data). In contrast, a comparison of four sources of data on prices received by cotton growers shows considerable agreement. Until 1994, when producer prices were the same across the country and across seasons, all sources, not surprisingly, report the same figure. But even in the post-1994 period the differences remain small. It is interesting to note that there are remarkable similarities in producer prices, where there is considerable room for subjective judgment, and large differences in production figures, where an objective count should be possible. That adds some credibility to the claim that exporters often underreport production and exports in order to lower their tax burden. This argument gains more validity if one considers that all three domestic sources consistently report lower post-1994 average production than ICAC. - 13 -  5. CONCLUSION In some respects cotton sector reforms have been successful. Producers receive a higher share of export prices, and they receive payments on time. Ginning capacity has increased enormously. Cotton moves more quickly through the marketing chain. And while there are many reports of a deterioration in quality, there is no evidence, apart from the mixing of cotton varieties, that anything but market forces is behind the small change. But many areas, from policy reforms to public investment, still need attention if the sector is to reach its potential. * Taxes should be reduced substantially, the tax code simplified, taxes consolidated and rationalized, and tax rates made uniform across all exports. This more equitable distribution of the tax burden should help to induce a supply response. Lowering taxes should improve compliance and boost tax revenues. * The Cotton Board should withdraw from activities such as quality monitoring and announcing indicative prices. Instead it should assume full responsibility for collecting and disseminating accurate statistics. That information will help to guide government policy and private sector investment decisions. * Public investment may be needed to move quickly on seed multiplication for the new cotton variety, UK91, possibly led by the board and the Ministry of Agriculture. Research suggests that the new variety is superior to the older releases and could result in higher yields. But achieving the higher yields requires release of enough of the new variety to forestall mixing with existing varieties. * Public investment may also be required to improve rail services and the roads in Mwanza, on which cotton is heavily dependent. - 14-  Notes Cotton production is prohibited south of the Matandu river (in the Mtwara, Lindi, and Ruvuma regions) in order to serve as a quarantine zone to prevent the spread of red bollworm disease from the cotton producing areas of Malawi, Mozambique, and Zambia. 2 Before 1956 Tanzanian cotton was marketed by the Uganda Lint Marketing Board. 3 On some occasions, however, private traders delayed payments to farmers, prompting the Ministry of Agriculture to issue a directive in July 1996 to revoke buying licenses if payments were not made up front (Shepherd and Farolfi 1999). 4 While it could be argued that the input supply system was functioning well as judged by low growers' default rates, the reality is that most unions dealing with sales and distribution of inputs faced severe financial stress and some eventually went bankrupt. 5 However, according to Cotton Outlook (June 28, 2002), the contribution to the Cotton Development Fund for the 2002/03 season was set at 10 Tsh per kilogram. With a price of 140 Tsh per kilogram of seed cotton, it would imply a 7.1 percent contribution. 6 These numbers imply that most cotton growers spay at most once. Prior to the reforms growers commonly sprayed two or three times. To achieve maximum yields, the research station recommends spraying six times (not necessarily optimal from an economic point of view.) 7 UK stands for Ukiriguru, 77 and 82 for 1977 and 1982, the years of release of the respective cotton varieties. 8 One may question the rationality of building new ginneries producing lower quality of cotton. Gibbon (1999, p. 136) reports that a high proportion of the smaller new ginneries had obtained loans at concessionary rates, mainly donor subsidized. He also reported that the buildings and equipment were second-hand (and in two cases even scrap). 9 That follows the logic that lower quality products are consumed close to the production point while quality rises the further away the consumer center. That, of course, assumes that both cotton and textiles are priced at marginal cost. For an exposition of this see the "Shipping the Good Apples Out" section (p. 345) in Silberberg (1978). 10 It is worth noting, however, that Gibbon (1998, p. 58) has challenged this, implicitly: "UK91 had either been introduced as a potentially universal seed for the whole WCGA, or at any rate came to be considered in Cotton Board circles to have this property." " The nominal rate of protection or taxation provides a comprehensive measure of the incentives or disincentives to a particular sector from sector- and economy-wide policies, including agricultural marketing and pricing policies, exchange rate policies, import duties on manufactures, and explicit taxes on exports. The direct effects come primarily from pricing policies and include the direct and implicit taxes on export crops and the monopsonistic behavior that widens the gap between producer and export prices. The indirect effects come mainly from the impact of trade and macroeconomic policies. 12 The remainder of this section is based on Ratter (1999). - 15 -  Box 1: The Primary Society of Chma Cha Msingi Meudama The primary society of Chama Cha Msingi Meudama is one of 343 members of the Nyanza Cooperative Union (NCU) serving the villages of Ngudam, with 360 families, and Nyamholomgo, with 500 families. The society, located 30 kilometers southeast of Mwanza, the second largest city in Tanzania, has 102 active members. Membership requires a one-time 200 Tsh fee and the purchase of at least one share (500 Tsh), which can be sold when a member drops out. The society purchases agricultural products, mainly cotton, and distributes input supplies. It owns one storage facility, including a scale and a safe deposit. The society's board consists of 10 elected officials (chair, vice-chair, and eight members), who serve three-year terms. The current board is all male, but women have served in the past. Management consists of the secretary and the assistant secretary, who come from the two villages. Formerly on a full-time payroll, they are now paid on a part-time basis because of the substantial reduction in cotton production. A few paid temporary workers assist the society during the cotton season. During the 2000/01 season society members planted close to about 325 hectares in cotton. The largest cotton farm is 4 hectares; most farms are between 0.4 and 1.2 hectares. The 91 farmers who grew cotton delivered between 250 and 500 kilograms of seed cotton to a nearby NCU-owned ginnery and were paid in cash. The society received finance from NCU, which in turn received finance from the National Bank of Commerce, a private bank, at 19 percent interest. Farmers received 150 Tsh a kilogram for their seed cotton. Private traders did not buy cotton from society members because, according to the society's chairman, farmers are loyal to the society and the low production levels are not attractive to private buyers. Farmers also grow rice, mostly for their own consumption though some sell small quantities to private traders for the market in Mwanza. Other food crops include cassava, maize, millet, groundnuts, and potatoes. Livestock raising is also common. The villages have no tractors or trucks. All cultivation is by hand, occasionally assisted by animal power. In an interview with four of the farmers, they identified a shortage of inputs (mainly chemicals) as a major obstacle to cotton production. By shortage, farmers meant a shortage of chemicals at the discounted price offered by the Cotton Development Fund. Chemicals were available at the market price of twice the fund price. Farmers were aware of the problem of mixing cotton varieties and the effect on yield. When asked "What would be the one or two things that the World Bank or another aid agency could do to improve your livelihood?" farmers replied: improve the school and construct a medical facility. Source: Author's interview, November 10, 2001. -16-  Box 2: Unions and the Private Sector-Perceptions and Reality Cooperative union members and government officials are skeptical of the private sector's involvement in marketing and trade activities in Tanzania. Their views reflect, at least in part, 30 years of experimentation with central planning. Consider the following interview with a high ranking cooperative union official. When asked for his views on private sector involvement in cotton marketing, he replied: "The problem with the private traders is that you cannot control them! You, as the World Bank, should support cotton to be produced. You should support the cooperative union and forget about the private sector." This thinking echoed the Arusha Declaration some 34 years earlier: "the way to build and maintain socialism is to ensure that the major means of production are under the control and ownership of the Peasants and Workers themselves through their Government and their Cooperatives" (quoted in World Bank 1977, Annex V, p. 47). When asked what kind of assistance would be needed to overcome the difficulties the cooperative union faced, he replied: "I need finance. If I am given enough finance, I could do better." Though unstated, implicit in this response was the assumption that the loan would not be at market rates or, if a history of debt accumulation by the unions and eventual forgiveness is any guide, would not be repaid at all. Most cooperative unions have difficulty obtaining bank loans because they lack creditworthiness not because banks lack funds or they are unwilling to lend. Since banking sector liberalization, obtaining finance has not been a problem for creditworthy borrowers. The manager of a union-owned cotton oil mill, currently leased to an entrepreneur, noted that there had been no difficulty obtaining a $340,000 loan to purchase the factory and another $300,000 loan to rehabilitate it-a 5-year loan at 12 percent interest from a private bank. When asked about the union's achievements prior to the reforms, the official responded: "We built all this infrastructure!" "All this infrastructure" is now insolvent and up for liquidation (a cotton oil mill), run-down or underutilized (several ginneries), or abandoned (two 2,000-hectare cotton farms). The problems with the cooperative unions were vividly described by Gibbon (1999, p. 135): "Internal corruption, inefficiency, maintenance of loss-making non-core activities, ... over-manning, under-qualified management and outdated and poorly maintained plant ... remain largely uncorrected." This description is similar to that of a government review (1999, p. 14), which reported: "A study undertaken by the Netherlands Government in 1990, on the quality of ginnery manpower working in ginneries owned by the cooperative unions found that: most of the staff were over 45 years of age; 90 percent of them were unqualified for their posts; most ginnery managers had no formal management training; above 80 percent of the ginnery workers did not meet the required minimum qualifications and their promotions were based on experience without undergoing any further formal training." Netherlands Development Cooperation (1994, p. 335) reached remarkably similar conclusions: "Studies in 1989 and 1992 judged that financial management of the [unions] was very weak, and revealed that both the Nyanza Cooperative Union and Shirecu were insolvent. They listed serious shortcomings in accountancy practices, revealed high marketing costs, and unrecoverable bank overdrafts. In addition they mentioned that the virtual absence of members' equity had made the unions become wholly financed by government, chiefly through bank overdrafts." More recently, Cotton Outlook (October 28, 2002, p. 9) reported: "A noteworthy of the [2002/2003 production] figures is the small quantity attributed to each of the two major cooperative unions. Purchases by SHIRECU and NCU are estimated at 2,648 and 1,348 tonnes, respectively. A local press report has referred to the huge debts with which NCU is burdened. The article mentions a figure of over seven billion shillings (roughly US $7,000,000), of which 4.5 billion (US $4,500,000) are owned to the National Bank of Commerce." Source: Author's interview, November 9, 2001. - 17 -  Table 1: Cotton Yields in Selected African Countries, 1970/71-2001V02 (Kilograms Per Hectare) SOUTrH FRANC YEAR TANZANIA UGANDA ZIMBABWE AFRICA BENIN MALI CHAD ZONE 1970/71 268 85 571 147 351 306 114 175 1980/81 111 13 459 136 231 397 188 310 1990/91 161 91 262 194 482 558 288 466 1991/92 235 55 88 157 518 531 239 415 1992/93 112 53 304 172 492 547 237 441 1993/94 125 65 261 199 439 500 234 430 1994/95 547 82 194 293 426 475 301 403 1995/96 244 87 394 304 502 504 298 437 1996/97 234 211 322 271 375 451 301 418 1997/98 129 186 334 226 397 434 275 424 1998/99 85 64 297 202 376 432 217 402 1999/2000 166 86 370 239 415 459 300 421 2000/01 174 109 370 245 413 456 320 422 2001/02 175 97 326 216 432 463 280 216 AverageA 199 99 294 277 439 484 274 408 a. Calculated over the 1990/91 to 2001/02 period. Source: ICAC various years, Cotton: Review of the World Situation.  Table 2: Prices Received by Cotton Growers, 1988/89-2000/01 EXCHANGE LINT PRICE PRODUCER PRICE RATE A INDEX EXPORT SEED A LINT SHARE YEAR" (Tsh/$) ($1kg) ($Ikg) (Tsh/kg) (Tshlkg) (Tshlkg) (percenit) 1988/89 121 1.43 1.43 173 22 67 39 1989/90 174 1.80 1.65 288 28 84 29 1990/91 207 1.84 1.66 343 41 123 36 1991/92 263 1.41 1.44 379 70 210 55 1992/93 351 1.29 1.22 429 60 180 42 1993/94 487 1.52 1.17 570 80 240 42 1994/95 539 2.02 1.69 911 120 359 39 1995/96 560 1.90 1.88 1,053 207 619 59 1996/97 600 1.73 1.59 954 170 509 53 1997/98 650 1.62 1.72 1,118 180 539 48 1998/99 750 1.33 1.22 915 185 554 61 1999/2000 800 1.16 0.99 792 123 368 46 2000/01 820 1.28 - - 185 554 - - is not available. a. Converted to lint equivalent using a ginning outturn ratio of 0.334. b. refers to marketing years July/August). Source: Government of Tanzania (1999b, table 5, p. 10); Kabissa and Myaka (2000); and author's calculations. -19-  Table 3: Quality Deterioration after 1994/95: Reasons, Qualifications, and Public Action REASON/EVIDENCE THAT How IT MAY HAVE AFFECTED THE QUALITY OF LIKELY PUBLIC QUALITY HAS CHANGED COTTON? EFFECT ACTIONA Declining input use Caused by removal of input price subsidies, mainly on Negative No chemicals. Any quality decline due to reduced input use reflects relative prices and hence market forces. Abandoning of zoning Prior to reforms cotton could be sold only to ginnerles in a Negative No designated zone. Following the reforms, as cotton prices rose in the late 1990s, fierce competition and overcapacity in ginning caused abandonment of zoning, leading to a mixing of seeds and ultimately reducing cotton quality. Mixing of UK77 and UK82 Prior to reforms different varieties of cotton were produced Negative Yes varieties in the lake and southern areas, each developed for the specific agroclimatic conditions of the area. Following the reforms the two varieties were mixed, reducing quality. Presence of El Nifno/La Nifia Exogenous shocks, recurring every five to six years, Negative No reportedly affected the quality of cotton during the 1997/98 and 1998/99 seasons. Construction of new ginneries Some of the newly constructed small ginneries are of the Neutral No saw type, which reportedly produce cotton of lower quality. Some of the ginneries used second-hand equipment. New large ginneries of the roller type produce higher quality cotton. Mixing of high (AR) and low Apart from the effects of lack of experience by new private Neutral No (BR) cotton grades traders in the first few years, the fact that grading did not return implies that the market did not attached a significant premium to it (i.e. the costs of grading outweigh the losses of mixing the grades.) Premium declined slightly In the seven seasons prior to reforms Tanzanian cotton Neutral No averaged a 10 percent premium over the A Index. In the seven seasons after the reforms it averaged an 8.8 percent premiurm. Reduced storage time Since the reforms cotton traders and exporters have Positive No shortened the time cotton is kept in storage, slowing its deterioration. Increased share of exports Because more cotton is exported since the collapse of the Neutral No textile industry, it may appear that the overall quality of exported cotton has declined. In fact, cotton of lower quality that might have been consumed domestically has just shifted destination. a. It indicates whether any public action is warranted. Source: Government of Tanzania 1999a; Gibbon 1999; Shepherd and Farolfi 1999; and author's interviews. - 20 -  Table 4: Tanzania's Cotton Premium over the A Index and Franc Zone, 1984/85-2001/02 NUMBER OF QUOTATION (DOLLARS PER KILOGRAM)B PREMIUM (PERCENT) YEAR WEEKSA A INDEX FRANC ZONE TANZANIA A INDEX FRANC ZONE 1984/85 35 1.58 na 1.78 12.8 na 1985/86 52 1.08 1.08 1.23 14.3 14.2 1986/87 52 1.37 1.40 1.49 9.0 7.4 1987/88 27 1.71 1.72 1.94 14.4 13.0 1988/89 34 1.33 1.34 1.52 14.4 13.9 1989/90 22 1.79 1.77 1.91 6.7 7.8 1990/91 27 1.81 1.80 1.98 8.9 9.8 1991/92 29 1.34 1.39 1.53 13.6 14.3 1992/93 52 1.27 1.25 1.37 7.8 10.1 1993/94 39 1.47 1.47 1.54 4.4 4.7 1994/95 0 na na na na na 1995/96 24 1.94 1.97 2.12 9.3 7.7 1996/97 15 1.67 1.67 1.75 4.8 4.7 1997/98 9 1.76 1.71 1.85 4.9 8.3 1998/99 13 1.43 1.47 1.62 13.4 9.8 1999/2000 14 1.08 1.10 1.22 13.6 11.2 2000/01 12 1.35 1.34 1.39 3.5 3.8 2001/02 11 0.92 0.94 1.03 12.3 10.0 AVERAGE 1984-94 37 1.48 1.47 1.63 10.6 10.6 1987-94 33 1.53 1.53 1.68 10.0 10.5 1995-2002 14 1.45 1.46 1.57 8.8 7.9 na. is not applicable. a. Numbers of weeks Tanzanian cotton was traded in North Europe in large volumes. b. Calculated for number of weeks reported in first column. Source: Cotton Outlook and author's calculations. -21-  Table 5: Post-Reform Ginning Capacity In The Lake Zone (Tons Per Month) NUMBER OF GINNERIES RATED CAPACIT Y ACTUAL CAPACITY CAPACITY RATIO' REGION UNION PRIVATE UNION PRIVATE UNION PRIVATE UNION PRIVATE MWANZA 11 7 9,557 5,681 3,387 3,375 0.35 0.59 SHINYANGA 7 6 7,350 6,907 2,357 4,235 0.32 0.61 MARA 3 4 2,242 4,379 727 2,372 0.38 0.54 TOTAL 21 17 19,148 16,967 6,471 9,983 0.34 0.59 a. Ratio of actual to rated capacity. Source: Government of Tanzania (1999a, annex 7, p. 32). Original data from the Tanzania Cotton Lint and Seed Board (reported in bales.) - 22 -  Table 6: Post-Reform Cotton Marketing Shares, 1994/95-1998/99 UNIONS PRIVATE TRADERS COTTON BOARD TOTAL YEAR TONS SHARE (%) TONS SHARE (%) TONS SHARE (%) TONS 1994/95a 103,981 85 11,009 9 7,340 6 122,330 1995/96 162,161 70 61,841 27 6,455 3 230,457 1996/97a 150,254 60 89,813 35 12,076 5 252,143 1997/98 90,174 43 116,906 56 1,075 1 208,155 1998/99 58,754 44 74,778 56 0 0 133,532 a. Data for these seasons exclude the Eastern Cotton Growing Area. Source: Government of Tanzania (1999a, table 6, p. 11). Original data from Tanzania Cotton Lint and Seed Board. - 23 -  Table 7: Composition of Taxes on Cotton, 1997/98 and 1998/99 TSH PER KILOGRAM PERCENT OF PRODUCER PRICE TAX 1997/98 1998/99 1997/98 1998/99 Export price 309.00 236.00 na na Producer price 202.00 185.00 na na Local taxes 10.10 14.20 5.00 7.68 District produce cess 6.20 9.20 3.07 4.97 Education fund 3.90 5.00 1.93 2.70 Central taxes 18.37 10.23 8.70 5.10 Board application and license fee 0.14 0.14 0.07 0.08 Export license ($2,000, flat fee) 0.43 0.43 0.21 0.23 Ginning license ($1,000, flat fee) 0.22 0.22 0.11 0.12 Board fee (0.8 percent of export price) 1.54 1.89 0.76 1.02 Stamp duty (1.2 percent of export price) 3.70 2.83 1.83 1.53 Withholding tax (2 percent of export prices) 6.17 4.72 3.05 2.55 Export duty (2 percent of export price) 6.17 na 3.05 na Total taxesa 28.47 24.43 14.09 13.20 na. not applicable. a. Does not include the Crop Development Fund or union and primary society fees. Source: Government of Tanzania (1998 and 1999a) and author's calculations. - 24 -  Table 8: Principal Institutions Involved in the Cotton Sector INSTITUTION ENTITY MAIN FUNCTIONS AND RESPONSIBILITIES Ministry of Agriculture and Government Supervises the sector. Acts as liaison between the sector and the Food Security legislature and provides legal and policy guidelines. Collects and disseminates statistics. Ministry of Cooperatives Government Oversees and regulates the cooperative unions. Provides policy guidance and operational framework geared toward restructuring cooperatives to operate on an independent, voluntary, and economically viable basis and to develop into centers for providing and disseminating agricultural inputs, implements, technologies, and information. Ukiriguru Research Station Government Established during the early 1930s and currently under the Ministry of Agriculture and Food Security. Conducts research on cotton- related matters, especially releasing new cotton varieties and advising producers on recommended chemical use. In 1991, successfully released the UK91 variety, which is supposed to replace UK81 and UK87. Tanzania Cotton Lint and Statutory Formed in 1995, effectively took over the activities of the Tanzanian Seed Board body Cotton Marketing Board. Its current responsibilities include advising the government on policy and strategies for developing the cotton industry; promoting development of the industry; licensing of persons engaged in the marketing, processing of cotton or cotton products; regulating for the control and eradication of cotton pests and diseases; and promoting and regulating the quality of cotton during marketing and export. Primary societies Private sector Village-level associations whose membership consists of farmers. Often act as agents of cotton buyers. Responsible for distributing seed and other inputs to farmers. Engage in a number of other commercial and noncommercial activities. Cooperative unions Private sector Associations of primary societies that often buy and gin cotton in their own facilities. Compete with private traders. Supposed to be private entities as of 1991. Cotton Apex Organization Private sector Created in 1996, membership consists of all cooperative unions involved in marketing and ginning cotton. Promotes the interests of its members. Tanzania Cotton Private sector Established in 1998, membership consists of cotton buyers, ginners, Association and exporters. Aims to encourage and maintain sustainable growth of the cotton industry, promote and protect the interests of those connected with it, and advise the government on matters related to the cotton industry. Source: Government of Tanzania (2000); Tanzania Cotton Association; and author's interviews. - 25 -  Table 9: Cotton Production According to Various Sources, 1986/87-1998/99 PRODUCTION (TONS) GOVERNMENT OF TANZANIA PERCENTAGE OVER ICAC YEARA Page 19 Page 32 Annex 4b ICAC Page 19 Page 32 Annex 4a 1986/87 37,662 73,743 67,553 72,000 -48 2 -6 1987/88 48,605 86,290 79,610 85,000 -43 2 -6 1988/89 72,562 65,154 54,177 64,000 13 2 15 1989/90 48,137 62,101 35,504 38,000 27 63 -7 1990/91 45,740 47,952 48,688 51,000 -10 -6 -5 1991/92 71,414 90,770 85,500 106,000 -33 -14 -19 1992/93 62,054 104,816 96,372 48,000 29 118 101 1993/94 67,761 50,234 45,666 43,000 58 17 6 1994/95 38,968 42,650 40,431 94,000 -59 -55 -57 1995/96 55,956 75,194 82,756 84,000 -33 -10 -1 1996/97 69,617 85,147 86,93L 66,000 5 29 32 1997/98 60,938 68,411 62,301 45,000 35 52 38 1998/99 36,200 45,404 36,453 55,000 -34 -17 -34 Average 1986-94 56,742 72,633 64,134 63,375 -10 15 1 1994-99 52,336 63,336 61,775 68,800 -24 -8 -10 a. It refers to marketing years, which begin on July 1 for Tanzania and August 1 for the International Cotton Advisory Committee (ICAC). b. Production in bales was converted to tons using a 181 kilograms per bale conversion factor. Source: Government of Tanzania (1999b) and International Cotton Advisory Committee. - 26 -  Table 10: Prices Received by Cotton Growers According to Various Sources (Tsh per kilogram of seed cotton), 1993/94-1999/2000 GOVERNMENT OF GOVERNMENT OF KABISSA AND TANZANIA (1998 MARKETING YEARa TANZANIA (1999a) MYAKA (2000) GIBBON (1999) AND 1999b) 1993/94 80 80 80 - 1994/95 120 120 120 - 1995/96 207 207 200 - 1996/97 170 170 160 - 1997/98 180 180 190 202 1998/99 185 185 - 180 1999/2000 - 123 - - is not available. a. Marketing year begins July 1. - 27 -  Figure 1: Producer's Share of Cotton Export Price % of fob --1994/95-1999/00 average -- 1988/89-1992/93 average 80% 4 0 % .-------------.- . . . .... . -. - - - - - - - ... 0% S159 919