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1 Crisis Responses in the Cashew Industry: A Comparative Study of Tanzania and Vietnam Blandina Kilama * PhD fellow, Tracking Development African Studies Centre, Leiden University Wassenaarseweg 52, P.O. BOX 9555, 2300 RB Leiden, The Netherlands Tel: +31 61 695 1453 Fax: +31 71 527 3344 bkilama@ascleiden.nl Abstract This paper explores the global financial crisis responses within the agriculture sector in Tanzania in the Sub Saharan Africa and Vietnam in South
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   1 Crisis Responses in the Cashew Industry: A Comparative Study of Tanzania and Vietnam Blandina Kilama *  PhD fellow, Tracking Development  African Studies Centre, Leiden University Wassenaarseweg 52, P.O. BOX 9555, 2300 RB Leiden, The Netherlands Tel: +31 61 695 1453 Fax: +31 71 527 3344 bkilama@ascleiden.nl  Abstract This paper explores the global financial crisis responses within the agriculture sector in Tanzania in the Sub Saharan Africa and Vietnam in South East Asia. Vietnam and Tanzania as many other export dependent economies were also affected by the economic crisis. A case study of cashew industry is adopted to understand the responses undertaken by both countries. This paper aims to look at the different macroeconomic variables and monetary policies responses that were adopted in Tanzania and Vietnam to arrest tightening of credit and decline in international trade. Stimulus packages to assist the productive sectors were invoked. In Tanzania the raw cashew nut is traded through the warehouse receipt system. This system shields the farmer. The auctioned cashew includes other transactional costs pushing higher the prices of raw cashew for local processors. In the wake of the crisis, local processors were confronted with both higher prices for raw cashew and falling world prices, resulting to reduction or even halting of production. In Vietnam the government introduced a 4% reduction in interest rates on loans taken for productive purposes, to curb for the credit tightening occurring due to decline in international trade. Based on the cashew industry the stimulus package in Tanzania protected the farmers unlike the processors while in Vietnam both the farmers and the processors were shielded. 1.   Introduction This paper examines differentials in macroeconomic and monetary policy responses adopted in Tanzania and Vietnam to arrest tightening of credit and decline in international cashew trade. The global financial crisis that started in the US in 2007 as a housing crisis, then a financial crisis, ended up as an economic crisis that created ripples worldwide 1 . This crisis drove the world economy mainly the industrialized countries into recession and developing countries faced serious uncertainties over its growth and development prospects 2 .   *   Paper to be presented at DIIS conference ‘Impacts, Responses, and Initial Lessons of the Financial Crises for Low Income Countries’ 14th -15th October, 2010 Copenhagen, Denmark.   1  Crotty (2009) 2  ibid   2 The impact of this economic crisis however, has not been the same across continents. Countries in Asia and Africa mainly involved in production of low end products of the value chain have been hit hard affecting many livelihoods and threatening to undo the  benefits enjoyed over the years 3 . In most of these countries the agrarian economy has  been the driver for economic development. Demand for and prices of commodities fell and capital inflows declined. In this paper, crisis responses within the agriculture sector, in particular cashew  production of two countries, Tanzania in the Sub Saharan Africa and Vietnam in South East Asia are examined. Tanzania is largely still an agrarian economy that produces crops both for the local and export market. Similarly Vietnam’s economy although slightly advanced than Tanzania also relies on agriculture as the main stay of the economy. The economies of the two countries were socially oriented after independence. They both embraced free markets in mid 1980s. Vietnam and Tanzania as many other export dependent economies were also affected by the economic crisis. Stimulus packages to assist the productive sectors were invoked.  Background “Many emerging markets lack the regulatory and legal infrastructure to support highly liberalized banking transactions, and they almost invariably lack the lender of last resort capacity to handle sudden shifts in depositor confidence. Trenchant observers, therefore, have long warned about the dangers of premature financial liberalization in such markets.” Radelet  et al  (pg 18) 4   The quote from 1998 is applicable to the global financial crisis in 2010. In the past decade and half we observed Mexico and Argentine economies tumble, followed there after with phase of East Asian. Worries arose, fearing that the crisis would undo the gains from the East Asia miracle. Experts from different disciplines aired the reasons for the crisis and little was said in anticipation there would be another greater crisis (see the  paragraph on causes). Neither Mexicans nor Thais would have believed that in less then twenty years a bigger economic and financial crisis would devastate the world and would be arising from similar circumstances like theirs. Not only would they (or as most  people) be skeptical but would also find it difficult to relate the writings of boom and  bursts cycles that affected national incomes 5 . 3  Wade (2009) 4  Radelet .S.; Sachs. J. D; Cooper . R.C. ; Bosworth B.P., 1998 5 From Keynes to Friedman, consumption depends on current income or expected income. Anything  beyond means would put one in debt. The global financial crisis arose in particular due to financial institution that were set up and kept on convincing a number of individuals to consume (take up loans)  beyond their means. Then obviously this greediness was unlikely to be sustained. This sort of explanation is what has been put forward by writers who predicted the boom and burst, where first the prices soared then collapsed (As was the case for prices of property in Thailand during the Asian crisis and morgage  prices in the USA). The resulting burst is which has led to the financial crisis coming from mis-pricing of risk, toxic debt or toxic waste, unstable global capitalism, insufficient regulations, among others (C.A.E. Goodhart, 2008; Blankenburg and Palma, 2009.)     3 Causes The Cambridge Journal of Economics dedicated a special issue to the global financial crisis 6 , with a number of contributors concerned with the causes of financial crisis. The structural causes of the current financial crisis are well documented by James Crotty (2009). Crotty looks at architecture and regulation processes in the financial sector. Morgan (2009) focuses on the malfunction of the central bank to detect these failures. Goodhart (2008) looks at the mis-pricing of risk and dangers in the over-expansion of the credit markets 7  as background to the crisis.   These causes do not differ much from those that were previously provided for the reasons that led to the Asian or Latin American crisis by Radelet et al  (1998) 8 . Their study in particular showed that aggregate short-term debt exceeded foreign reserves by a substantial margin. This in turn led to credit panic and thus further deepening of the crisis in Asia. Further more, “partial reforms had led to increasingly fragile financial systems, characterized by growing short-term foreign debt, rapidly expanding bank credit, and inadequate regulation and supervision of financial institutions ” 9 . To sum it up, the cause of this crisis has been financial mismanagement arising due to burst of the housing mortgage or sudden shifts in financial flows or over stretching of the debt carrying capacities and as Palma (2009) would put it, “markets took their inevitable revenge”. Consequences The causes of the global financial crisis are mainly rooted in the financial sector but the repercussions unfortunately are not only limited to the financial sector alone 10 . According to World Trade Organization (WTO) Global trade flows were set to shrink  by 9% during 2009. We observe rising trade protectionism in hard hit economies leading to the rise of state capitalism, and doubts about what has been seen as the Western economic model of market based capitalism. Countries that depend much on exports are increasingly finding it difficult to trade with the west due to shrinkage in not only cheap credit but also demand of their goods and falling commodity prices (as shall  be seen later). Practically, Tanzania and Vietnam were affected as primary producer countries. With cashew as a relatively important crop for small holders, I would like to assess effects and responses to financial crisis by the cashew industry of the two countries. This paper will shy way from the causes of financial crisis and rather focus on the efforts undertaken by countries to curb the consequences of the financial crisis, in particular Tanzania and Vietnam. In particular the paper zooms on the cashew industry for both countries. A case study of cashew industry is adopted to understand the responses undertaken by both countries. Key informant interviews with processors were conducted during the crisis period in 2008/2009. But before going ahead and looking at the 6  Cambridge Journal of Economics 2009 Special Issue: The Global Financial Crisis Volume 33 Issue 4 July 2009 7  The liberalized financial markets, “made banks less concerned about the quality of credit assessment and monitoring of the borrowers conditions during the course of the outstanding loans”. Pg 337. On the other hand, a prolonged under pricing of risks in particular interest rates which were low deepened the cause. 8  Radelet .S.; Sachs. J. D; Cooper . R.C. ; Bosworth B.P., 1998 9  ibid 10  The world economy was expected to shrink by 1.3% in 2009, unemployment was expected to rise by at least 30 million people from 2007 to 2009 and three to five trillion US dollar worth of assets is estimated to be written down (Blankenburg and Palma, 2009, citing the IMF and ILO) .     4 interventions undertaken to mitigate the crisis, here is the roadmap of the paper. This  paper first starts by way of background with the operation of the world trade and then introduce the status of world cashew sector and where Tanzania and Vietnam fit in. Section B provides an overview of the impact of crisis on cashew production in Vietnam and Tanzania with a brief historical overview of the countries mainly along the lines in a comparative perspective, and the effect of the crisis on the cashew production in the two countries. Section C examines responses undertaken during the crisis in particular the support received during the financial crisis by productive sectors; including the cashew industry. The paper concludes with some recommendations. 2.   An Overview Of The Impact Of The Financial Crisis a)   World Trade The world has observed a sharp decline in trade, both exports and imports. By the third quarter of 2008, the world net exports tumbled. World merchandise trade on the second and third quarter of 2008 was 28% and 23% respectively higher than in the same period of 2007. G1. Quarterly world merchandise trade (2006q1 to 2010q2) 0500100015002000250030003500400045005000    2   0   0   6   Q   1   2   0   0   6   Q   2   2   0   0   6   Q   3   2   0   0   6   Q   4   2   0   0   7   Q   1   2   0   0   7   Q   2   2   0   0   7   Q   3   2   0   0   7   Q   4   2   0   0   8   Q   1   2   0   0   8   Q   2   2   0   0   8   Q   3   2   0   0   8   Q   4   2   0   0   9   Q   1   2   0   0   9   Q   2   2   0   0   9   Q   3   2   0   0   9   Q   4   2   0   1   0   Q   1   2   0   1   0   Q   2    b   i   l   l   i  o  n   d  o   l   l  a  r  s -40,0-30,0-20,0-10,00,010,020,030,040,0   y  e  a  r   t  o  y  e  a  r  p  e  r  c  e  n   t  a  g  e  c   h  a  n  g  e Value World exportValue World import% World export% World import   Source: WTO, 2010 However, the world of merchandise trade observed reduction in trade by eleven percent on the 3rd quarter of 2008 and a reduction of 30% in the first half of 2009. Trade improved once again in the fourth quarter of 2009. Recovery in trade is currently observed, the value of world merchandise trade was around 25% higher in the first three months of 2010 than in the same period of 2009. Global exports rose by 27%, while imports rose slightly less, at 24%.
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