Structural adjustment and intersectoral shifts in Tanzania: a computable general equilibrium analysis

Structural adjustment and intersectoral shifts in Tanzania: a computable general equilibrium analysis

Appropriately designed structural adjustment can benefit agriculture and the poor

This study analyzes the effect of stabilization and structural adjustment policies on overall economic growth, sectoral performance, welfare,and income distribution in Tanzania. It reviews policy programs implemented and economic performance achieved since the beginning of the reforms, highlighting economic fluctuations under changing political conditions. It also report reviews the computable general equilibrium (CGE) methodology.

The report focusses on three areas:

  • trade liberalization,industrial protection,and the bias against agricultureexamining the traditional analytical issues of agricultural versus nonagricultural economic growth and the problem of adverse agricultural terms of trade due to a biased domestic policy regime and external economic conditions
  • exchange rate devaluation in an import-dependent economymotivated by Tanzania’s history of substantial currency adjustments under structural adjustmentprograms,the importance of the exchange rate issue for export-oriented economic growth in Tanzania,and,consequently,the continuous challenge of the external stability of the Tanzanian shilling
  • devaluation under decreasing marketing margins, focussing on macroeconomic policies, such as devaluation of the real exchange rate, in conjunction with complementary policy measures,like the improvement of the transportation and communication infrastructure

Conclusions include:

  • the low exchange rate following economic liberalization,essentially eliminated the policy bias against agriculture in Tanzania
  • under structural adjustment total absorption in the economy falls for three reasons:decreasing imports,decreasing production through a fall in imported intermediate inputs,and increasing exports which results in overall economic welfare decreases
  • in absolute terms,devaluation leaves nonexport-oriented producers worse off than they were before adjustment because of worsening production opportunities this likely to boost agriculture rather than industrial sectors because of the important role of export agriculture
  • Complementary policies, such as an infrastructure investment program aimed at improving marketing services, make structural adjustment easier, more efficient, and, above all, more equal in terms of income generation and distribution,which particularly favors the rural poor
  • appropriately designed structural adjustment can benefit agriculture and the poor through lower adjustment costs and fewer negative welfare effects

Finally the paper observes that the extensively liberalized economy remains extremely vulnerable to internal and external shocks and changes in its underlying macroeconomic policy environment. Furthermore,the effects of macroeconomic policies cannot be analyzed in isolation,but must be viewed in their overall economic context,including complementary policy measures that can help to enhance their effectiveness and ameliorate the costs of adjustment,especially for the poor.

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