The economics of parallel markets for foreign exchange and illegal trade: Focus on Tanzania

This thesis is divided into six chapters. Chapter 1 discusses incentives for smuggling and chapter 2 presents the Tanzanian institutional setting.Chapter 3 presents a smuggling model which links the smuggling of goods with the parallel markets for foreign exchange. We describe an economy with two regions, one accessible to smuggling and the other not. The economy produces three goods, a pure export crop, an import good, and a non-traded good. There are three factors of production: labor, which is mobile, and capital and land, which are sector- and region-specific. Our smuggling model explicitly shows price disparity can occur in the region with smuggling, even when smuggling occurs solely through unofficial channels. Our model also shows smuggling causes the traded goods to have different prices in the two regions.Chapter 4 estimates the quantity of coffee smuggled from northern Tanzania into Kenya. Our results suggest that about 12 percent of the arabica coffee (or an annual average of 3800 metric tons) produced in northern Tanzania between 1969 and 1985 was smuggled into Kenya. The annual average value of the estimated volume of coffee smuggled is about 8 million dollars.Chapter 5 places the smuggling model in a computable general equilibrium framework. The framework is used to analyze the impact of changes in trade taxes on inter-regional migration of labor and the magnitude of smuggling.Chapter 6 uses the general equilibrium framework to show how decreases in trade taxes increase economic welfare in both regions. This chapter also considers the policy of simultaneously giving producers of export crops farm input subsidies and taxing their exports. The discussion questions the logic of this policy where the government wants to reduce smuggling. It also challenges the notion that the so-called farm input subsidies are actually subsidies to farmers and raises the question whether they are not, instead, disguised subsidies from farmers to producers of inputs.U of I OnlyETDs are only available to UIUC Users without author permissio