Commodity Price Changes and Consumer Welfare in Tanzania in the 1990s and 2000s

Type Working Paper
Title Commodity Price Changes and Consumer Welfare in Tanzania in the 1990s and 2000s
Publication (Day/Month/Year) 2009
This paper analyses the effect of commodity price changes on household consumption
(welfare) in Tanzania during the 1990s and 2000s, and from this simulates the welfare
effect attributable to trade reforms (tariff reductions). The objective is to measure the
total household welfare effect, distinguishing both static (first order) and dynamic
(second order) effects of commodity price changes. First we use the three rounds of the
Tanzania Household Budget Survey (1991/92, 2000/01 and 2007) to estimate consumers’
responses using Deaton’s method, based on median unit values (price) and household
budget shares. These are then utilized to evaluate the distributional impacts of the
relative commodity price changes on consumer welfare in terms of compensating
variation. The results indicate that, in real terms, price increases have worsened the
welfare of most consumers during the1990s and 2000s; the poor, and in particular the
poor in rural, bore much of the brunt compared to the non-poor (in particular the urban
non poor). The welfare losses in the 2000s were greater than those in the 1990s. Although
we cannot establish explicit links between trade reforms and domestic commodity price
changes, to assess the extent to which welfare changes can be explained by trade reforms
we simulate the effects of tariff reduction on domestic price changes (using Customs data
on import values and tariff revenue at a product level). The simulation shows that tariff
reforms tended to offset the welfare losses for all household groups, as expected as tariffs
were reduced for most products. The non-poor, especially rural non poor, and the urban
poor benefit more in relative terms from tariff reductions.

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