The Impact of Regulatory and Institutional Arrangements on Agricultural Markets and Poverty: A case study of Tanzania's Coffee Market
Despite some early gains in the post liberalisation period, the performance of Tanzania's coffee sector has failed to meet expectations. Both quality and production show a declining trend. But most concerning from a poverty perspective is that the producer price share for Tanzanian coffee growers is lower than in most other coffee producing countries. Several programmes are currently in place in Tanzania that aim to stimulate agricultural growth and reduce rural poverty, but the impact of these interventions on poverty reduction has been limited. Numerous initiatives to increase access to inputs, improve research and processing infrastructure in the coffee sector have not been able to reverse negative trend. The reason is that the markets that they aim to improve are subject to institutional and regulatory weaknesses that when unresolved, will reduce the impact of the significant resource flows.
A complex and multilayered regulatory environment is one of the key underlying causes of the coffee sector's weak performance. The existing marketing regulations dampen competition in the market and as a consequence limit the growth for small growers' incomes. Superfluous licensing requirements prohibit the entry of small operators to the market, reducing employment opportunities for small entrepreneurs and grinding down the prices offered to small growers. Village buying and contracting restrictions against private coffee buyers also weaken competition and create monopsonistic buying conditions. Regulatory restructuring that dismantles these restrictions will be an important way of stimulating the coffee market's performance. Licensing requirements for village buying need to be removed. The coffee regulations need to be amended to allow private buyers to engage in contracts that allow the remittance of a quality premium to coffee growers throughout the buying season. Currently, cooperatives have a regulatory monopoly on this type of contract, which contributes to the under provision of quality in the market. But reforming laws and acts is unlikely to be sufficient. Competition between the two main players - cooperatives and private buyers - to influence regulatory reform is dynamic and strong. Therefore, innovations that improve the regulatory environment whilst also reducing the distributional conflict between the groups (by offering incentives to the losers for instance) will be critical for the sustainability of the reform.
Although small coffee growers suffer the most from the inadequacies of the regulatory environment, they lack effective and organised representation that is independent from the agendas of the cooperative movement or the local authorities, making them the group with the lowest levels of information, access to regulators and influence. Supporting the emergence of a strong coffee growers association, which is independent of the agenda of either the coffee cooperatives, villages or the large coffee businesses, would contribute to redressing the balance of power in the market.
Overall, a road map is needed for building competitive agricultural markets before a sustainable impact on poverty reduction will be seen. Group dynamics and the underlying political economy of the market are key variables for the success of any such initiative, and in many cases, solutions that take the vested interests within the market into account may have to be sought. In particular, solutions that consider the political economy of the market as a dynamic factor are likely to be the most sustainable interventions.
Shireen Mahdi. May 2010
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Last modified: 05 May 2010