Transportation Costs, Food Markets, and Structural Transformation in Tanzania

Project Active from to Cities

The growing wealth of nations has, throughout history, been associated the movement of people off the land, out of subsistence agriculture and into more dynamic forms of economic activity, in large-scale agriculture, in export-oriented manufacturing and in the services sector.  Underpinning this transformation is rising productivity in agriculture which provides for both rising food output (generating higher rural incomes) and falling real food prices (raising urban living standards), while at the same time releasing labour to the non-agricultural economy.

What is striking in Tanzania, though, is the absence of any significant structural transformation, despite a fairly impressive macroeconomic performance over the last 20 years. The overwhelming majority of the population still lives in rural areas and works in agriculture, predominantly depending for their livelihoods on farming small plots of land, where they primarily produce food for home consumption.  Productivity in the agricultural sector remains generally very low and is an important factor in explaining Tanzania’s limited success in poverty reduction since 2003, despite high aggregate growth.

Many of the key constraints to growth are to do with the nature of agriculture itself but others are to be found outside the sector.  This project examines one the ways in which high transportation costs – affecting both domestic and international trade – influence the current structure of the Tanzanian economy and contribute to Tanzania’s slow transformation from an agrarian to an industrial and service-oriented economy.  At the border, high transportation costs reflect not just tariffs and policy distortions but high costs associated with deficiencies in port infrastructure as well as problems of logistics and management. Internally, transportation costs are very high both between Dar es Salaam and regional centres, and between farm and market. This reflects poor road infrastructure as well as possible non-competitive behaviour in the marketing and transportation sectors. As a result, food prices in urban centres are often double the prices received by farmers. Moreover, they appear to be considerably higher than the prices at which similar commodities might be imported from North American or European markets.

Our approach is fundamentally analytical rather than empirical. Using a numerical simulation model we conduct counterfactual analysis to explore how reductions in transportation costs might reduce the fraction of Tanzania’s labour force devoted to quasi-subsistence agricultural activities. We consider how various interventions, such as investment in the rural road network, might affect the pace of urbanization and the growth of non-agricultural economic activities.  This project will not focus on diagnosing the problems of the transportation sector itself, but we plan to offer measures of the potential impacts of reducing transportation and transaction costs. Our models will allow us to examine how reductions in transaction cost wedges through, for example, public investment in the rural roads network will change patterns of production, consumption, labour use, and other variables of interest in the economy.