Trade liberalization and the structure of production in Tanzania

This thesis explores the role of trade and trade liberalization policies on Tanzanian economy with special focus on the performance of agricultural sector. In terms of methodology, we first use parametric and non-parametric tests to evaluate the impact of liberalization policies on the growth rate of exports. Secondly, we use ordinary least square and instrumental variable to test the “inverse relationship hypothesis” and then we estimate the effect of liberalization on land productivity. We also extend this analysis to Uganda in order to ascertain whether similar findings could be replicated in other developing countries. Thirdly, we employ the co-integration technique to evaluate the effects of openness on economic growth. The parametric and non-parametric tests shows that: despite the marked variation in the composition of traditional exports especially during the late 1990s; largely from coffee and cotton to cashewnuts and tobacco, the contribution of trade liberalization in fostering export growth is rather weak. Second, although the volume of food crops during the post reform period is much higher than before the reforms, there are no symptoms of increased growth overtime. The empirical evidence from econometric analysis shows the existence of diminishing returns to land in the agricultural sector. On the other hand, the impact of trade liberalization on land productivity is mixed; while in some traditional exports its impact is negative and significant, in others the impact is positive but not significant. Contrary to the conventional wisdom as documented in the traditional theories of comparative advantage, the problem with Tanzanian agriculture is not related to the land size but low productivity. Interestingly, these results are also replicated in the Ugandan case. The cointegration analysis shows that the share of trade to GDP is negatively correlated with economic growth. In general, the contribution of this thesis has wider implications in the development policy, at least for the case of Tanzania and other developing countries. First, trade liberalization policies are counterproductive unless diminishing returns to land is squarely addressed. Secondly, the existence of diminishing returns to land is incompatible with the simple prediction of the theory of comparative advantage. The presumption behind trade liberalization is that specialization according to the “comparative advantage” doctrine would inevitably enhance increased productivity (i.e., efficiency). Our results do not conform to this presumption. Third, diminishing returns means that as production increases with international specialization, every additional unit of commodity produced would be more expensive to produce. Fourth, the persistence of diminishing returns to land is incompatible with poverty reduction