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.