Monday, January 5, 2009

Why We Need Commodity Markets.

In the mid 1980s Tanzania changed the way it organize its politics and economy. On the political side the change was skillfully accomplished under the leadership of Mzee Mwinyi, with guidance from Mwalimu. As a result, Tanzania is one of the few countries on the continent that was able to move to a multi-party system without major social upheaval. The current assertive Bunge, which includes opposition parties, has created one of the few dynamic and progressive governments in Africa. Freedom of speech, political accountability, voter parity, etc, is largely a result of Mwinyi’s changes. More reforms are yet to be executed in the political arena but nobody can deny our progress. To the contrary, we can not say the same thing about our economy. The transition from our centrally planned economy to the free market economy has produced lukewarm economic growth.

The main reason for this lackluster economic growth, in my opinion, is that the reforms implemented over the past 25 years to introduce the elusive free market – introduction of the stock market, the push to private property, aggressive tax collection, halting of agriculture subsidies, etc – unlike the political ones, were not driven by Tanzanians. Rather we gave the international fairies (IMF and WB) the authority to restructure our national economy. Since foreign “experts” do not bother to understand our local economic structure and comparative advantage they gave us standard textbook reforms. Therefore, most of these reforms missed the “epicenter” of the economy which is in the informal sector: the agriculture industry. Our recent history traces reforms from the IMF’s structural adjustments to the current UN Millennium Development Goals (MDG). Most of the time, the internationally “peddled” reforms are based on sound theoretical models but look at our country as a generic economic canvas. This canvas is supposed to be restructured and given goals to achieve, independent of what is on that canvas.

The result is the creation of institutions and systems that do not serve the majority of the citizenry. In Tanzania these reforms have resulted in a waste of the collective wealth and in some cases pure wealth-destruction. We can look at our stock market with all of its eight stocks and ask ourselves: does the Dar-es-salaam bourse represent the country’s capital accumulation? And the companies that raised capital through this market; are they the ones which need it most? Are these companies the best purveyors of the country’s wealth?

If the answers to the above questions (and many other questions) are “no,” then why did we start our transition to the free markets with the stock market and not another market like the commodities market to serve our agriculture industry? Or municipal (or equivalent of) bond markets to rebuild our infrastructure? Or introducing ways of measuring consumer purchasing power (like credit scoring, i.e. FICO) in order to give power to credit markets and therefore allow consumer products – such as mortgages, car loans, credit cards, equipment leasing, etc – to transform the economy? There are many different markets that would have benefited the country and the majority of Tanzanians.

We have now spent twenty five years in this lackluster zone. Time to rethink the whole premise: who has the capital? Who will best utilize that capital and therefore create more wealth? And most critical: how can we, efficiently, link those who have capital to those who will best utilize that capital?

Don’t get me wrong. I’m not against the stock market. In general we know these markets are essential for a country to achieve a meaningful level of economic growth. I just don’t think that our economy is best served by the stock market when 80% of the population is employed in the agriculture industry; an industry that is dominated by small-holder farmers with not much industrial agricultural processors.

The Tanzanian GDP is $16.18 billion (Official, 2007) with the GDP measured by a Purchasing Power Parity of $51.07 billion (2007); Agriculture contributes 42.5%, Industry 18.9%, and Services 38.5% (2007). Agriculture also dominates Trade: it provides 85% of exports. In the mean time, there are only two agricultural companies listed in our stock market: TATEPA and TCC.

The government is right to give priority to Agriculture for the 2009 economic agenda as sighted in JK’s speech for the New Year. JK stated that the government has set aside ten billion shillings to be given as loans to farmers through the Tanzanian Investment Bank (TIB). But in my opinion, this is the wrong way of organizing credit availability to farmers.

The current banking system is staying away from giving loans to the agriculture sector, not because the industry is not profitable but because it is too risky. The agricultural industry is opaque to the banking sector because almost all small-holder farmers function in the informal economy. Therefore giving farmers government loans one-by-one will not solve the problem of credit availability. The solution will have to be systemic and agriculture-focused.

The government should use this ten billion instead to create a COMMODITIES MARKET. The commodities market would have the advantage of formalizing the contribution of the agricultural sector and creating positive externalities to the economy. At the same time infusing capital into the agricultural industry would increase productivity of both land and labor.

In conclusion, our poverty problem exists, not because we don’t have wealth, or we are less intelligent or even as many suggest, lazy. Rather, we simply need a system that does not see us as a generic canvas, but draws on our endogenous national strengths.

10 comments:

GAME THEORY said...

Good drop JM.

But you forgot to tie this with the existence of a substantial tsh/USD market outside the reach of capital controls.



I think there are two factors shaping this black market. The first is the capital controls - rapidly globalising Tanzania is increasing chafing at the bit. The second is the incredibly bad market design of the currency market.



In Tanzania, our equity market was supposed to set the benchmark for transparency of financial transactions.I'm told that there is pre-trade transparency (order books are visible in realtime) and post-trade transparency (exact transaction information is put out in realtime). In addition, equity market intermediaries separately reveal

(a) the price at which a transaction was executed on the market as opposed to (b) the brokerage fees charged by the intermediary. On the equity market, liquidity resides in the public, nationwide market, and the broker is only a transactional pathway to the market.



In contrast, our currency market fares poorly on all three counts. It is highly non-transparent from the viewpoint of customers, lacking post-trade and pre-trade transparency. This makes it difficult for customers to ensure that they are getting best-price execution. Banks do not unbundle the price on the currency market as opposed to their intermediation fees.


All i know is when DSE brokers were first asked to separately show brokerage fees as opposed to the price at which a transaction was executed, they thought that was waaaay tooooo much info to give, and yes there has been someinstances where DSE brokers would routinely lie to customers, claiming that a purchase was executed at a higher price than it really was. Lacking transparency, customers (sijui tuwaite walala hoi) were not able to cross-verify these claims. These very abuses are found on the currency market in Dar today: customers are not able to cross-check prices owing to the lack of pre-trade or post-trade transparency, and customers are not told what they are being charged for financial intermediation services as opposed to market prices.



The people who work on policy issues (ambao JM amewataja) of the currency market have not adequately learned from the success story of the equity market in other countries.



In short:

1. There is much more convertibility than meets the eye;

2. The currency spot market is one of the most important commanding heights of the economy, and it's a real shame that it has a 19th century market design, aimed at perpetuating entry barriers, profits for banks, non-transparency and high transactions costs for customers;


3. If policy makers want more of the currency market to come above the ground, then an exchange-traded currency spot market is required, where brokers clearly unbundle their brokerage charge from the price seen on the public limit order book.



As an aside, with commodity futures also, there is a substantial `number 2 market', which competes with the official regulated markets. These parallel currency and commodity futures markets reflect an exit from the mainstream regulated markets by some players. If wise policy making is able to unify all liquidity into the public markets -as has pretty much happened with the equity market - we will be able to reap substantially more liquidity than is presently the case...lakini wapi...sie ni kama sikio la kufa liso sikia dawa...

Rash said...

nice peace JSM, I am current preparing the peace called WHY CAPITALISM FAILED IN AFRICA? You touched the center point of the problem.

Lack of formal capital markets system detour the principles of capitalism in Africa. You mentioned about our GDP which is the benchmark of our economy, what surprised me is the number of investor which pour some money on this particular sector. The government invest less than 10% in the sector which contribute more than 50% of our economy growth. That sound like fuzzy math.We're still stucked in the export means growth economy.

I do blame the system, we have unstructured system. Our people hold a good asset, but they don't know the value of their assets because of the poor system. For instance, in Tanzania you can find the good house which is located between of know where. The owner of the house doesn’t have the title of the house or he doesn’t have even the title of the land. The lack of the title prevent the owner to capture the full value of his investments, most importantly the lack of formal title prevent him from using the land and house as a collateral and that prevents the unlocking of the capital from the assets.

IMF and world Bank are using one fits all strategy. For instance, if the study was made about cotton production in Tanzania, the same study will be used for coffee production and etc. I also challenge our government to use our people to develop a strategic plan which will fit our nation, and not adopt non sense from IMF and WB.

You mentioned about Muni bond and commodity trade board. I think that is a good idea, because our people have surplus in cash, but there are few financial vehicles. Another thing is the power of central government, our central government control everything and that leave the local government as a sysmbol.

I think we need a new system which will fits Tanzania environment & culture. For instance, mikoa should retained certain amount of money which they produce, instead of sending all the money to the central governemnt and wait for their portion.

I will post my peace of WHY CAPITALISM FAILED IN AFRICA soon after i finish it.

www.jamii1.blogspot.com

Rash said...

nice peace JSM, I am current preparing the peace called WHY CAPITALISM FAILED IN AFRICA? You touched the center point of the problem.

Lack of formal capital markets system detour the principles of capitalism in Africa. You mentioned about our GDP which is the benchmark of our economy, what surprised me is the number of investor which pour some money on this particular sector. The government invest less than 10% in the sector which contribute more than 50% of our economy growth. That sound like fuzzy math.We're still stucked in the export means growth economy.

I do blame the system, we have unstructured system. Our people hold a good asset, but they don't know the value of their assets because of the poor system. For instance, in Tanzania you can find the good house which is located between of know where. The owner of the house doesn’t have the title of the house or he doesn’t have even the title of the land. The lack of the title prevent the owner to capture the full value of his investments, most importantly the lack of formal title prevent him from using the land and house as a collateral and that prevents the unlocking of the capital from the assets.

IMF and world Bank are using one fits all strategy. For instance, if the study was made about cotton production in Tanzania, the same study will be used for coffee production and etc. I also challenge our government to use our people to develop a strategic plan which will fit our nation, and not adopt non sense from IMF and WB.

You mentioned about Muni bond and commodity trade board. I think that is a good idea, because our people have surplus in cash, but there are few financial vehicles. Another thing is the power of central government, our central government control everything and that leave the local government as a sysmbol.

I think we need a new system which will fits Tanzania environment & culture. For instance, mikoa should retained certain amount of money which they produce, instead of sending all the money to the central governemnt and wait for their portion.

I will post my peace of WHY CAPITALISM FAILED IN AFRICA soon after i finish it.

www.jamii1.blogspot.com

Anonymous said...

Game Theory,

Thank you for your analysis, but these are my analysis on your comment,

Can you please press that return key only once, once you have finished a paragraph, currently you are skiping three lines before writing a second paragraph.

I think it feels mind torturing scrolling all the way down to read your comment, after every paragraph, this is a comment section you need to make it short, sharp and clear.

Just a point to your presentation!

Thuwein said...

Good stuff man. A really insightful read. The idea of putting cash to aide wakulima was plausible-but using banking system would somehow leave so many small wakulima unqualified to lend money basing on bank's standards. If we can somehow stop politicizing everything and put fine, fine public servants in charge with the right economic platform-tutatoka kwenye umaskini. I think our politics are hurting our economy big time.

Mpambika said...

Interesting thoughts January.

Fundamentally (not necessarily practically), it is perhaps about time Tanzania establishes a commodity market as an effective endpoint of the agriculture value chain. I have no problem with that. However, I have an issue with us always taking the simplest path, i.e. blame others when we don't like what we see.

The stock market had to start, and it will take sometime to thrive. The ability to trade equity is not only a vital element in business but also it provides nationals with ability to invest in major corporations. Even more important, listing obligates companies to stay clean (a rare treat around here) as long as done right.

If we look in the mirror, we will see the culprits. We just need to execute few things right and things will start to happen. The problems you see in infrastructure - ports, power, railway, airports - has little to do with the DSE. Development of the these can happen without sovereign bond issuing because the appetite to invest in these areas is enormous.

It is partly because of our own ineffectiveness and incompetency that is why we don't like what we see. And sometimes our sheer lack of commitment to execute the simplest tasks, projects.

Having said, establishing a commodities market will bring about the desired changes because the whole value chain needs to be fixed. Something as simple as using irrigation and tractors. I will not even touch land reforms which in itself as prevents mortgaging, commercial-farming development, financing etc.

Let's demonstrate commitment first. Commitment to make things happen, to do well and righteously.

What is the point of a commodity market if we continue to have mediocre infrastructure? This is just one example.

JSM said...

Mpambika,

Thanks for your comment; I like your constructive criticism. First let me be out there, JSM stands for Jaffer S. Machano and not January. I just don’t want him to get the criticism due to my shortcoming.

I agree with you that infrastructure is very important and I like your point in the following paragraph: “If we look in the mirror, we will see the culprits. We just need to execute few things right and things will start to happen. The problems you see in infrastructure - ports, power, railway, airports - has little to do with the DSE. Development of these can happen without sovereign bond issuing because the appetite to invest in these areas is enormous.”

I think you are right that if we look in the mirror the face we see is ourselves. That’s why I said: we let the fairies take the authority of our “commanding heights.” The point I am raising here is that – we are the ones to blame and therefore change.

As far as sovereign bond goes, I also agree that it is hard to justify. But I guess you can write more on this issue of infrastructure: who are these investors [categorically] who wants to invest in the Tanzanian infrastructure and what is their motivation. More so how can that play out (will this be a private investment on a public asset?). I know there are a lot financial institutions which invest in infrastructure. A good example is Macquarie bank from Australia. In the US they have been buying quite a bit of infrastructure properties. Last year they bought the Chicago highway from downtown to O’hare airport, which is a toll road.

I also support the idea that investment in infrastructure has to go hand in hand with the commodities market.

If Tanzania is able to create a system that could invest in infrastructure and agriculture at the same time the economic growth will definitely be significant enough to actually make a dent in the level of poverty.

JSM

Kweli said...

JSM
Thank for your informative post and all you guys who contributed to the post.
For someone like me who has little understanding of all these stock and Commodity market I can contribute very little and will comments on the obvious in 'plain terms' as I can see it in black and white.
We really should have done better than we had in 25 years of free market Economy. Considering we already had good platform to build upon which is a political stable Country unlike other African countries where multi -party transition accompanied social upheavals.
The reason of our stagnate performance was due to lack of competent Economists and Leadership on the helm.
Our Leaders of the day couldn't negotiate a level playing field with IMF/World Bank and main Donors, Instead they were bullied into unfair recommendations and other re-structuring conditions such as currency devaluation, tariff reduction and Farmers subsidies.
It took the efforts of the guys like Bono and Bob Geldolf to vigorously battle with WB and IMF to ends their dirty games on behalf of long suffering mwananchi (what is it with our Leaders?)
I think to have success in Free market we need also to rely on a Consumerism which means we have to increase the number of Investors and Traders, we will need an educated workforce in urban areas plus good infrastructure for the system to work.
Perhaps we should also introduce flat income tax rate? I think this bold move worked well in Estonia. At the moment our tax system is shambolic and discouraging many Investors. Flat tax rate will make life easy and create a win win situation for everyone and will attract more Investors, the only looser will be the corrupted revenue officials as it will be more difficult for them to fiddle with figures . Above all nothing can be achievable without good Infrastructure. It is so vital.

Please read some interesting link on Estonia Free Market success.
http://www.rferl.org/content/article/1078562.html

http://ncwatch.typepad.com/media/2008/06/can-california.html

Anonymous said...

Nice piece JM,
It is dishearting to know after over 10 years since the introduction of DSE the awareness in the society is simply not there.
Just visit DSE website
http://www.darstockexchange.com/
and you may see where the change needs to start

Mchangiaji said...

JSM,

A very good suggestions, but here are my concerns, and I believe majority would raise the same questions, Trust me I have been thinking about your idea over and over again, and I said to myself what an excellent approach, that to me sounds a very good one fits the niche of our own making as a nation of wakulima and a lot of land resources, but at the same time a very comprehesive process which would need a lot of input by all, therefore Government and private sectors.

This approach to me it means, an actual A REAL TRADING compared to the stock markets, which in generally means VIRTUAL assests, NOT TANGIBLE items involved. In which in somehow fall onto the hands of SPECULATORS or I would call them MAFIA mob, who pretty much cause a lot of havoc in the WEST TRADING SYSTEM, around the globe.

Comming back to our discussion. Here are my questions concentrating on Agricultural, Need to know more of specifics!

1. How are we going to improve Agricultural in GENERAL in this country, with or without Government SUBSIDIES, weight in on our options in terms of number in all agricultural sectors, include perishable(like fruits) and non perishable goods(Pamba, Kahawa and so on). Bare in mind we need to concentrate on both.

2. How, are we going to improve the standard of Agricultural sectors?, ie. in terms of UKULIMA WA KISASA, In other words how, are we going to shift from current position(jembe) to that mass productivity by using our land resources more effectively.

3.Most importantly, How are we going to get ourselves onto Agricultural Products from various industrial sectors, which in turn WATAWEZA KURESTORE AU KUSINDIKA HAYA MAZAO TUNAYOYAPATA FROM AGRICUTURAL SECTORS.

4.THIRDLY and MOST IMPORTANT, How are we going to trade these products within and outside the country ??. Take in case, We will definetely need the outside market to sell our products, How we are going to approach and do that, ie, exporting of our agricultural products, product like Mango or Orange Juices produced from TAnga, Packaged Pamba from Mwanza, Sealed Sugar bags from Kagera?? and so on so forth.

These are just few of questions, need methologic approach, if answered Properly and designed in a good framework, engaging all involved including the market and agricultural Guru, I totally AGREE WITH JSM, that would then ENHANCE OUR ECONOMY in agricultural sector Immensely, and this is where we failed previously to impliment on vijiji vya ujamaa.

I will give you a little story, THIS IS A REAL STORY, there was a business man, who wanted to sell Mango prouduced from Tanga, He actually approached the people involved, TESCO super market, he showed them the mangoes, the quality guys tested them, and when they all agreed, that this is GOLD, what a delicious fruit, they went back to the guy from Tz, and asked him, if we need two containers of these lovely fresh mangoes, packaged in these standards, in this specific time(from harvest to consumer) so and so forth, are we going to get them ?, The lonely business guy immediately start thinking how in the hell I am going to get two containers from Tanga, restored them in cool condition, packaged, processed and delivered them in time here in UK. The lonely guy jumped ship, and no where to be found. LOL!!

and this is a sort of scenario, which needs lot of thoughts and mechanism in place, which would involve government and private sectors to make it achievable.

By the way, I have seen myself in one of the super market, passion FRUITS, packed and produced in KENYA, My hope we can do the same, not just for International market but also for our own market needs, whether that regions to regions or within African continent. I am sure Nigerians would love to eat mango sometime in the future.

By Mchangiaji