Economics Essay – Tanzania Agriculture Kilimanjaro

Tanzania Agriculture Kilimanjaro

Chapter ONE

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Agribusiness is the most of import sector in the Tanzania Economy. It is the chief beginning of support to about 80 % population and employs 70 % of the active labor force. It contributes about 50 % of the GDP and approximately 75 % of the foreign exchange net incomes. In Tanzania Agriculture is dominated by smallholder husbandmans with farm sizes runing between 1 hectare and 3 hectares. Most of these smallholders use the manus hoe as the chief cultivating tool. Ox Big Dippers are used by about 20 per centum of the husbandmans and about 10 per cent usage tractors ( Ministry of Agriculture, Food Security and Cooperatives ( MAFC ) 2006 ) .

Coffee, the taking hard currency harvest of Tanzania contributes 20 % of foreign exchange net incomes and has been the chief stay of the economic system since its debut some100 old ages ago. Geographically, production covers the undermentioned parts ; Kilimanjaro, Arusha and Mara in the North ; Kagera in the West and ; Mbeya, Iringa, Kigoma and Ruvuma in the South. About 95 % of all java husbandmans are smallholders and the staying 5 % were province owned estates which are now privatized. Apart from 400,000 farming family who traditionally produce java, extra 2,000,000 have been estimated to be indirectly employed by the industry ( MAFC, 2006 ) . Smallholders typically receive a little fraction of the export or international monetary value for java because of high conveyance and minutess cost and monopsony rents captured by private bargainers or public selling boards ( Baffes, 2005 )

Surveies of the impact of liberalisation on domestic agricultural markets in Tanzania have shown that post-reform markets are by and large competitory, characterized by a big figure of little market participants but with few big bargainers and trading endeavors ( Fafchampset Al,2005 ; and Xavier and Channing, 2006 ) . Other literatures have besides highlighted some bounds to the success of liberalisation, such as limited entree to credits by husbandmans, increased costs of inputs, nonexistent bringing mechanism for inputs, unequal storage capacity, inter-annual monetary value fluctuations, and grower’s limited entree to information on market monetary values ( Fafchamps, 1992, Alderman 1993, Coulter and Onumah, 2002 ) . Markets play an of import function in pull offing hazards that are associated with supply and demand dazes. Well incorporate markets facilitate accommodations in export flow across infinite and in storage over times which help to cut down monetary value variableness between manufacturers and consumers. In world markets in rural Africa have hapless communicating and conveyance substructure, limited regulation of jurisprudence, restricted entree to commercial finance which limit the grade of market to work efficaciously. Empirical literature paperss consider trade good monetary value variableness across infinite and season in developing states with assorted trial of market integrating proposing important and perplexing foregone arbitrage chances ( Fackler and Goodwin, 2001 ) .

This survey is organised as follows ; chapter one includes debut of the survey, background of java market in Tanzania and selling policy, analyze principle and the aim of the survey ; chapter two briefly reappraisals empirical literature on spacial monetary value transmittal and cointegration, chapter three discusses informations set beginning its restriction and methodological analysis ; chapter four consequences and treatment and chapter five decision.

  • Background of Coffee Market and Marketing Policy in Tanzania
  • The history of java industry in Tanzania

Coffee was introduced to Tanzania early in the twentieth century as an estate harvest, but finally became a smallholder harvest. During the 1920s expatriate java agriculturists formed a brotherhood to market their java and the first selling co-operative of native agriculturists was established in the Kilimanjaro country in 1932, chiefly to advance java as a hard currency harvest among peasant husbandmans ( Baffes, 2005 ) . Subsequently, co-operatives grew in size and figure, but they were confined to parts bring forthing export harvests. Before 1976 the primary societies handled java procurance, paid husbandmans, and delivered the java to the two co-operative union-owned processing mills, in Moshi for java Arabica and Bukoba for java Robusta. The java was sold to exporters at the Moshi auction, operated by the Tanzania Coffee Board. Before 1990 the Tanzania Marketing Board and the concerted brotherhoods handled all java selling activities such as input proviso, transit, and processing. Reforms introduced in 1990 affected inputs, monetary value proclamations, and dollar export net incomes keeping.

More comprehensive reforms began in 1994/95 leting private bargainers to buy java straight from agriculturists and procedure it in their ain mills for the first clip in more than 30 old ages. A cardinal thrust for the reforms in 1994 was the worsening portion of export monetary values received by java agriculturists. The mean producer’s portion of Arabica export monetary value prior to the reforms was 60 % and Robusta was 59 % . For illustration, seting nominal java monetary values for rising prices ( domestic consumer monetary value index ) gives an norm of 612 Tanzanian shillings ( Tsh ) a kg for the three-year period after 1996/97. Using the manufacturer monetary values reported in the 1998 and 1999 revenue enhancement surveies for the 1997/98 and 1998/99 seasons ( 1,242 and 1,000 Tsh a kg for Arabica and 320 Tsh and 375 Tsh a kg for Robusta ( Baffes, 2005 ) . Like any other developing states Tanzania substructure is still hapless as consequences making a big difference in java monetary values from the part that are far manner from Moshi auction. Study of reform impact has found it hard to set up impact of reform on supply response where comparing of pre- and post-reform norms is enlightening. The mean end product was 50 918 dozenss in the nine seasons before 1994 and 45 065 dozenss in the five seasons after 1994, a 13 % diminution. By this simple step the impact of the reforms on production was let downing. An interesting image, nevertheless, emerges if one disaggregates the information by java type. Mild Arabica production declined about 20 % while difficult Arabica and Robusta increased by approximately 10 % . While there are terrible jobs with the quality of the informations, several steps point to the same decision: the supply response has non been big, and Arabica production has most likely declined ( Baffes, 2005 ) .

Producer can sell their java either straight to private companies, co-operatives through primary society or husbandmans group selling their java straight to Tanzania Coffee Board ( TCB ) . All of the Tanzanian java is available to purchasers throughout the universe from accredited java export companies in Tanzania which are supposed to buy their java from the auction held by TCB in Moshi and non straight from manufacturers. Coffee auction is held hebdomadally during the season which is August to April. Electronic auction is conducted merely in Thursday where java is sold in footings of ‘in store’ warehouse and exporters bulk their java and conveyance to Dar Es Salaam or Tanga for transportation.

  • Coffee Selling policy

Tanzania authorities presently has no agricultural trade good policy that provides a clear image on how the trade goods are traded. All affairs refering java selling are controlled by TCB. One of the TCB regulative regulations for quality and measure control states that all java produced in Tanzania for export must be marketed through the Moshi java auction. The auction appears to be an efficient pricing mechanism, in the sense that realized monetary values move in conformity with the New York Board of Trade hereafters monetary values ( Baffes, 2005 ) . The econometric survey of the pricing efficiency of Moshi java auction, found a close unitary snap of monetary value transmittal from the New York hereafters to auction monetary values ( Baffes, 2005 ) .

However, the image of the survey alterations when the marketing cost-efficiency of the auction is taken into history. The compulsory nature of the auction increases selling costs highly due to storage and transits. Owners of java have to hive away their java at board-certified warehouses, deliver samples to the auction, with a representative nowadays at the auction to repossess the java, with an extended paperwork which can take every bit long as eight hebdomads. This activity requires clip where the java proprietors incur conveyance costs, storage costs, administrative disbursals, forgone involvement net incomes and the hazard of an inauspicious monetary value motion ( MAFC, 2006 ) . Apart from efficiency additions, riddance of the compulsory demand of all java to travel through the auction will enable java bargainers to market Tanzanian java through neighbouring states, particularly Kenya and Uganda for the neighbouring parts. This will enable the bargainers and even husbandmans themselves trade their java and avoid conveyance costs, which add a load due to hapless route substructure, information flow as both states enjoy considerable Prime Minister for their java in both mild Arabica and Robusta. The volume of java produced by Tanzania is really minimum on the universe market such a trade agreements will non impact the universe monetary value for these peculiar types of java. Keeping the auction mandatary is frequently defended on the evidences that it provides choice confidence, simplifies the aggregation and airing of statistics, and ensures a premium for Tanzanian java. However, none of these statements appear to be supported by the facts. Coffee quality has been worsening since the java auction came under the support of the Coffee Board ( Baffes, 2005 ) . Apart from the auction being compulsory purchasing processs are still tightly controlled by the Coffee Board. For quality control purposes to guarantee full adulthood of the java beans, each twelvemonth the board announces the day of the month on which java purchasing should get down. The determination provokes dissensions between the board on one manus and agriculturists and bargainers on the other. The particulars on java harvest home are an issue that should concern merely the agriculturists and the bargainers, non the authorities.

Despite the reforms, java industry in general and Coffee Board in peculiar are both controlled by the Agricultural Sector Lead Ministries ( ASLMs ) which include Ministry of Agriculture Food Security and Co-operatives ( MAFC ) , Ministry of Industry, Trade and Marketing ( MITM ) and Prime Ministers Office Regional Administration and Local Governments ( PMO- RALG ) ) still hold excessively much power. The latest Coffee Industry Act of 2001, for illustration, stipulates that ‘The Board shall hold the power to make anything’ which in the sentiment of the Board is calculated to ease and heighten the proper exercising of the maps of the Board.

1.2The survey Rationale

While trade reform may offer greater chance for developing states to take part in International Trade, there are several barriers that might do local markets to be less antiphonal to economic signals originating from external markets. Winterset Al( 2004 ) have indicated that transportation costs are by and large higher in developing states and frequently ease the boundary line dazes as they pass through to families for imported goods and decline the dazes for exported goods. Furthermore economic signals can even acquire lost wholly if markets are monopolized which is a typical features of markets in developing states dominated by marketing boards or private monopolies that frequently emerge when the markets are liberalized. The extent of monetary value transmittal from one domestic market to other domestic markets monetary value is a critical parametric quantity in empirical economic theoretical accounts which attempt to measure the impact on monetary values, end product, ingestion and public assistance within a state under trade reforms. Understanding the extent to which monetary value are transmitted across lodger and parts of a state is really of import to measure how manufacturer and consumer in local markets are likely to react to monetary value alteration in external markets. Findingss from monetary value transmittal provide utile penetration in to the grade of monetary value integrating in local markets and high spots policy intercession steps needed to better markets efficiency.

The survey is an effort to analyze monetary value linkages between the normally known three markets for java in Tanzania. How monetary value from chief java market which is Kilimanjaro are transmitted to the other two markets Mbeya and Ruvuma.

1.3. Objective of the Study

The survey seeks to reply the undermentioned cardinal inquiry:

  • To analyze the monetary value relationship ( cointegration ) between Mbeya java market and Kilimanjaro every bit good as between Ruvuma java market and Kilimanjaro ;
  • To find if the monetary value alterations in Mbeya and Ruvuma java market are caused by the monetary value alterations in Kilimanjaro java market and what is their policy deduction.
  • Are there any apparent alterations in the nature of monetary value transmittal between Mbeya and Kilimanjaro every bit good as Ruvuma and Kilimanjaro in the analogical period?

Chapter TWO

  • Literature Review
  • Theory of Market Integration

Market integrating is the bosom of public assistance analysis in economic science it has been explored under ages of jurisprudence one monetary value and it has proved to be country of empirical and theoretical involvement. If markets are efficient in the intelligence of competitory equilibrium with zero marginal to arbitrage, it is expected that the difference in monetary values at equilibrium across infinite to account for transportation cost. The literature on monetary value transmittal indicates that there are at least six groups of factors impacting it.

Conveyance and dealing costs: where the dealing cost can be classified in three groups of information, dialogue and monitoring and enforcement costs. These Acts of the Apostless as cuneus between different markets which need to be overcome by the entire monetary value difference between two locations to let for arbitrage and integrating to take topographic point between two markets. The intervention becomes simple with an premise of stationary, relative to merchandise measures instead than fixed, besides if the premise is made to be linear instead than multiplicative. If this is non the instance modelling monetary value transmittal and integrating requires non additive theoretical accounts or additive theoretical accounts including thresholds ( Barrett and Li, 2002 ) .

Market power: this occurs along the production concatenation where some agents behave as monetary value shapers while some other as monetary value takers, depending on the grade of concentration of each industry. It may be the instance that e.g. input monetary value increased may be passed to consumer, while input monetary value lessening can be capture by in the grade ups of the industry ( Goodwin and Holt, 1999 ) .

Increasing return to scale in production: along the same line they may be at the beginning of market power although every bit has been shown their consequence on perpendicular monetary value transmittal is different from that of market power ( Mc Corristonet Al, 2001 )

Product homogeneousness and distinction: the grade of replaceability in ingestion between similar goods produced in different states may impact market integrating and monetary value transmittal.

Exchange rates: the extent to which alterations in exchange rates are passed through on end product monetary values has been studied in relation to the ability of houses to know apart monetary values across finishs to market construction, to merchandise non-homogeneity, and the accommodation costs of house ( Knetter, 1993 ) .

Border and domestic policies: those that are straight affect spacial monetary value transmittal are trade policies, although domestic policies impacting monetary value formation make besides impact both perpendicular and spacial monetary value dealingss ( Baffes and Ajwad, 2001 ) . Among boarder steps, non tariff barriers may hold strong effects on monetary value transmittal: this is the instance of variable duties ; duty rate quota, prohibitory duties and proficient barrier.Advaloremand fixed duties, alternatively should act precisely like relative and fixed dealing cost severally. All these elements affect both spacial and perpendicular monetary value dealingss.

Market Integration has been traditionally associated with the “Walrasian” construct of transportation of extra demand from one market to another via trade flows, monetary value dazes or both. Under this trade flows are sufficient to signal spacial market integrating, but do non needfully connote monetary value equalisation, which is consistent with inefficient Pareto distributions ( Barrett, 2005 ) . A 2nd attack, based on Baumol’s work on contestable markets focuses alternatively on the full development of arbitrage rents and competitory markets. Under this 2nd attack to spacial market integrating, two markets are integrated when there are zero fringy net incomes to arbitrage, go forthing agents apathetic about trading, and hence, making a competitory equilibrium and Pareto efficient distribution ( Barrett and Li, 2002 ) .

Several analysts have used spacial monetary value behavior as an index of overall market public presentation in different states. Alderman ( 1993 ) argues that there is a direct relationship between the manner the stabilizing policy work and implemented and to the extent to which internal market are integrated. With differences in ecological status it influences harvest production forms which result to differences in monetary value motions. Isolated market can convey inaccurate monetary value information that distort manufacturer market determination and consequence to inefficient merchandise motion ( Alderman and Shively, 1991 ) .

In competitory market spacial arbitrage lower monetary value difference between markets to the degree of dealing costs. However, certain features of agricultural production, selling and ingestion such as unequal substructure, market entry barrier, undependable market and monetary value information render the procedure of arbitrage a hazard activity for bargainers. The determiner of magnitude of dealing cost include the quality of the physical and facilitating selling substructure every bit good as marketing information ( Fafchamps Al. 2003 ) .

2.2Spatial Integration between Markets

Techniques to prove for the grade of spacial market integrating between spatially separated markets have developed bit by bit over clip. Many of the early surveies applied to agricultural markets developing states used the thought of correlativity between the monetary values of spatially separated market ( Abdulai, 2000 ) . The usage of correlativity coefficients to prove for market integrating has many failings because factors like population growing, climatic forms, monopoly procurance of agricultural merchandises at the same monetary value from different market and rising prices might bring on general effects across markets. Another restriction of correlativity analysis in to prove for spacial monetary value linkage is the possible for independent monetary value fluctuation within the border or set created by dealing costs ( Lele, 1971 ) .

The Enke-Samuelson-Takayama-Judge Model has studied market integrating and developed theoretical accounts based on the monetary value derived function between two markets for an indistinguishable good depends on the size of dealing costs between the two locations. The relationship of monetary value in a given clip T, is expected to be Rit= Rjt+yijt, which is spacial equilibrium where Ritis the monetary value of java in location I in clip T, Yijtis the transportation cost from J to i in clip t. Transfer cost is defined to be market intermediary costs which include conveyance cost and unseen costs such as burden and impermanent storage. In the context of spacial integrating, ( Baulch, 1997 ) refers to the competitory equilibrium Rit= Rjt+yijtas first government ; 2nd government non trading equilibrium which besides exist with the instance of high transportation cost or low monetary value as |rit-Rjt| & lt ; yijtand 3rd government as |rit-Rjt| & gt ; yijtwhere there is positive fringy returns to bury market trade, signalling foregone arbitrage chances and markets which are absolutely uncompetitive. The 3rd government can signal impermanent market equilibrium or non competitory market by positive fringy net income to arbitrage due to oligopolistic behavior or limitation on trade. Spatial market integrating is analysed by looking on the behavior of monetary value motion by utilizing monetary value series informations where in this analysis the transportation cost are assumed to be fixed and can non suit interseasonal flow reversals ( Fackler and Goodwin, 2002 ) .

Obstfeld and Taylor ( 1997 ) test the jurisprudence of one monetary value utilizing a threshold methodological analysis based on Hoeckcher?s impression of “commodity points” . The thought was the being of a “neutral band” or “band of inaction” where high dealing costs imply that arbitrage does non happen because it is non expected to give any positive additions. Once above a certain threshold, arbitrage becomes profitable and monetary values tend to equalise. Therefore, any analysis that does non see these thresholds will be given to undervalue the extent of integrating by utilizing Threshold autoregressive ( TAR ) and Momentum Threshold autoregressive ( MTAR ) techniques ( Abdulai, 2000 ) . This besides allows appraisal of the velocity of convergence of monetary value. Non-parametric appraisal, which allows gauging dealing cost sets without presuming any functional signifier ( Serra, Goodwin and Mancuso, 2004 ) . This technique tends to foretell larger grades of integrating than TAR theoretical accounts. An advantage of threshold theoretical accounts is that they do non necessitate dealing costs informations for gauging the “neutral band” ; nevertheless, they assume changeless dealing costs. In add-on, these theoretical accounts continue presuming unidirectional trade flows and threshold cointegration techniques tend to be extremely parameterised.

Regression-based processs have besides been used to prove for spacial monetary value integrating ( Gardner and Brooks, 1994 ) . However, the usage of regression-based trials has several defects. The theoretical accounts are fundamentally inactive in nature because accommodation slowdowns are non explicitly recognized and at the same clip arbitrage conditions are assumed to keep. Besides, non-stationarity of monetary value informations may annul standard econometric trials therefore giving misdirecting consequences sing the grade to which monetary value signals are being transmitted from one to another market. The restrictions related to the ignored dealing costs and monetary value fluctuation within the dealing cost set besides use to arrested development trials. Time-series analysis techniques are widely used to prove for the dynamic nature of interregional trade good trade and arbitrage activities. These trials typically use one or more techniques such as Granger causality, dynamic arrested development trials, impulse response analysis of structural or non-structural Vector Autoregressive ( VAR ) theoretical accounts, and cointegration analysis.

2.3Empirical Relationships between Markets

Granger causality ( GC ) trials are typically conducted within the VAR model. Following attack ( Granger, 1969 ) . The attack is used to prove for spacial monetary value integrating in footings of lead and lag relationships among dynamically interrelated monetary values. Granger causality trials may supply some illations about the being of statistically important lead/lag linkages among monetary values. However, GC trials, taken entirely, indicate merely whether the relationship between period and lagged monetary values is statistically different from nothing. Inferences from GC trials do non uncover the nature of the relationship. Therefore, it is necessary to supplement Granger causality trial consequences with other illative processs. Other restrictions associated with correlativity coefficients and standard arrested development attacks to proving for market integrating besides use to GC trials. Cointegration trials are trials of long-term inclinations. The usage of these trials has been justified on the averment that arbitrage behavior prevents monetary values in spacial markets from floating excessively far apart. The premise inherent in this averment is that conveyance costs are stationary. Ignoring dealing costs that might forestall spacial arbitrage thereby inhibit monetary value transmittal, and failure to account for discontinuous or bidirectional trade, are the major restrictions of co-integration analysis ( Baulch, 1997 ; and Goodwin and Piggott, 2001 ) .

2.4Limitation and unfavorable judgment of statistical attacks

The restrictions of the modeling attacks discussed supra have contributed to the development and application of more sophisticated attacks to mensurate market integrating such as the threshold autoregressive theoretical account ( Obstfeld and Taylor, 1997 ; Goodwin and Piggott, 2001 ) . However, these sophisticated techniques are basically hard to pattern and necessitate specific computing machine accomplishments or package. In drumhead, mensurating the grade of monetary value transmittal lacks a individual expressed empirical trial because of market dynamic relationships that arise due to inertia or discontinuity in trade every bit good as non one-dimensionality that arise due to deformations in arbitrage.

Chapter THREE

  • Methodology
  • Data set and survey restriction

The hebdomadal monetary value informations for this survey are taken from Tanzania Coffee Board ( TCB ) . The TCB was by an Act of Tanzania Parliament in 1993 to modulate activities of java industry such as regulative, supervisory, consultative, monitoring, coordination, representation and licensing all operations in java concern and behavior java auctions. The monetary value informations is for three known java zones which are: – Mbeya as West zone, Ruvuma as South zone and Kilimanjaro as North zone. Tanzanian java which is chiefly exported is mild Arabica. The java is graded utilizing different size of screen dimension in which the chiefly used classs are as follows: –

AA – Screen size 18 and it’s the highest class for export

A – Screen size 17

B – Screen size 15 and 16

C – Screen size 14

This survey will utilize the AA class which is the highest class for export in all of the 3 zones in analysis. All monetary values are auction monetary values which are considered as sweeping monetary value. The electronic auction command is conducted every Thursday and the auction is conducted twice a month and the monetary values are recorded by TCB.

Tanzanian java is capable to seasonal fluctuation in which all the three zones have different cropping seasons. Due to seasonal fluctuations, the informations recorded was limited to each zone cropping season therefore it is hard to happen observations covering all the three zones for each season. Due to such seasonal fluctuation this survey uses merely available observations. The available observations from Mbeya and Ruvuma were matched harmonizing to available observation in Kilimanjaro. The entire observation that were obtained for Kilimanjaro and Mbeya series were 130, Kilimanjaro and Ruvuma series were 126 and for all three series together were 112.

  • Diagnostic Trials and Appraisals

The survey is based on the construct monetary value transmittal complemented on series analysis of Weekly java monetary values for Mbeya and Ruvuma as dependent variables of hebdomadal monetary values of java on Kilimanjaro. The java market in Tanzania is organised in such a manner that chief java auctions for exported java are conducted in Kilimanjaro, therefore Kilimanjaro monetary values proxies the universe java monetary values and are used as independent variable in the arrested development. The basic analysis process which is carried out to research the clip series belongingss of the informations included: –

  • Pair-wise secret plan for each of the markets with Kilimanjaro. Since Kilimanjaro is the chief market for java in Tanzania the secret plans will compare monetary values motions and fluctuations from Mbeya market and Kilimanjaro and Ruvuma Market and Kilimanjaro ; and
  • Stationary trial ( unit root trials ) ; If variable contains unit root means the variable is non stationary ( Harris and Sollis 2005 ; and Shahidur 2004 ) . Besides if variables contain unit root, so it is non stationary and In this instance oftenNumberss of stationary variables are included into the cointegration infinite, the figure of cointegration vector will besides increase byten. Having unit root the stochastic procedure depend on t-test. There are different ways of proving the presence of unit root such as Cointegration Regression Durbin-Watson ( CRDW ) trial which is based on Durbin- Watson statistic, Philips and Perron trial for non parametric trial which is based on Phillips Z trial. The accent of this survey will be based on Augmented Dickey- Fuller ( ADF ) attack to prove the order of integrating and optimal slowdown length finding will be based on the Akaike Information Criterion ( AIC ) ( Harris and Sollis 2005 ; and Shahidur 2004 ) . This is the first measure in analysis which will find the dynamic belongingss of monetary value series to understand if the monetary value braces are integrated in the same order. The trial for unit root helps to avoid specious arrested developments due to one to one relationship between the figure of stationary variable and figure of cointegration relationships ( Shahidur, 2004 ) .

The unit root trial will be followed by the cointegration trial by agencies of Johansen process and Engle and Granger causality trial. The cointegration trial will be followed by Granger causality trial for the non-cointegration. The Vector autoregressive ( VAR ) will be used to gauge the Model as shown in subdivision 3.4.0.

  • Model Specification and appraisal techniques

Vector autoregressive ( VAR ) theoretical account is used in economic appraisal and it considers several endogenous variables together. Each endogenous variable is explained by its lagged values and the lagged values of all other endogenous variable in the theoretical account. VAR is used to calculate extrapolate expected values and future values of each of the variables utilizing observed lagged values of all variable presuming no farther dazes ( Kushrestha and Nag, 1999 ) . The VAR appraisal equations take the undermentioned signifier:

( 1 )

( 2 )

WhereYbases for java monetary values for the dependent market ( Mbeya and Ruvuma ) andtenbases for java monetary values for the independent market, Kilimanjaro. The theoretical account applies to both series Mbeya and Kilimanjaro and Ruvuma and Kilimanjaro. The theoretical account appraisal figure of slowdowns will be based on the AIC, and the attendant figure of lags observed will be used in the Granger Causality trial.

  • Theories of Unit Root

In the initial signifier of the trial involves appraisal of the simple first order autoregressive theoretical account AR ( 1 ) by agencies of Ordinary Least Square ( OLS ) .

( 3 )

Where the value of the variable in a given period () peers to its value in the old period () plus a perturbation. Equation 1 can be modified to equation 3 after () is subtracted from both sides:

where l= ?-1( 4 )

Depending on the type of equation tested the nothing and alternate hypothesis takes the undermentioned signifiers.

Hydrogen0: B = 1 or fifty = 0

H0: |b| & lt ; 1 or |l| & lt ; 0

The value of coefficient ( B ) or ( cubic decimeter ) determines the nature of the series. When ( B ) equals one or l = 0 the series contain a unit root. If it is less than one or cubic decimeter & lt ; 0 so the series is stationary. Testing for unit root by agencies of equation 1 and 2 will connote the premises that mean is zero and the observation is a simple first order Autoregressive ( AR ) with no tendency constituent in the implicit in informations bring forthing procedure ( d.g.p ) ( Harris and Sollis, 2003 ) . This is extremely stiff attack and contrary to the common regulation that arrested development theoretical account used for proving should incorporate more deterministic constituents than the hypothesised d.g.p ( Harris and Sollis, 2003 ) . The theoretical account can be extended where clip tendency exist to covers both hypotheses equation 2 will include an intercept ( a ) and the clip tendency ( T ) ( Harris and Sollis, 2003 ) :

( 5 )

On the footing of the belongingss, the unit root trial will be applied to the remainder of the arrested development between each brace of monetary values to prove for cointegration.

  • Theories of Cointegration

Two variables are said to be cointegrated when they move closely together over clip after proper grading. The definition in the simple instance of two clip seriestenTandYT, that are both integrated of order one ( this is abbreviated I ( 1 ) , and means that the procedure contains a unit root ) , istenTandYTare said to be cointegrated if there exists a parametric quantityasuch thatUT=YTatenTis a stationary procedure. Cointegrated implies variablestenTandYTportions similar stochastic tendencies and their difference vitamin ET( error term ) is stationary and they ne’er diverge excessively far from each other. The cointegrated variables exhibits a long term equilibrium relationship and the error term is the equilibrium mistake stand foring short term divergence from the long term relationship ( Harris and Sollis, 2003, Carter Hillet Al, 2001 ) . The construct of cointegration mimics the being of a long tally equilibrium to which an economic system converges over clip, and uTdefined above can be interpreted as the disequilibrium mistake ( i.e. the distance the system is off from equilibrium at clip T ) trends, although until officially tested both could be stationary variable around a deterministic, instead than difference stationary latter connoting that they contain one or more unit root.

There are legion trials that can be used to prove for cointagration. Harris and Sollis ( 2003 ) suggest the usage of Dickey -Fuller ( DF ) or ADF trials in which they claim that the comparable Z-test by Phillips and Philips and Perron ( PP ) are besides normally used. Engle and Granger ( EG ) ( 1987 ) stated that two seriestenTandYTare cointegrated of order ( vitamin D, B ) when they are both integrated of the same order I ( vitamin D ) and the error term ensuing from the arrested development of the series is of the lower order of integrating I ( d-b ) where B & gt ; 0. The EG starts with look intoing the degree of integrating of the variables in inquiry by distinguishing them until the stationary series is obtained. The unit root trial was based on equation 2 with the invariable included to let the stochastic tendency ( Carter Hill et al 2001 ) and figure of slowdowns of dependent variable indicated by the Lagrange Multiplier ( LM ) trial. Thevitamin Dvariable represents the first difference of the variable in inquiry such thatvitamin D= DyT= YT-yt-1in which alteration invitamin Dis expressed in equation 5 as follows:

( 6 )

With decision on the order of integrating for the series the appraisal is done by utilizing simple Ordinary Least Squares ( OLS ) in signifier of YT= bc + vitamin ET. The remainders are so tested for stationarity by agencies of ADF trial with changeless and lagged differences term included.

=( 7 )

Engle and Granger ( 1987 ) suggested inclusion of clip tendency to prove equation ( 7 ) , nevertheless Hansen ( 1992 ) proved that it reduces the power of the trial ( Harris and Sollis, 2003 ) . Engle and Granger tested the hypothesis that xTand YTbeing non cointegrated, what was the equivalent to remainders incorporating a unit root against the option that they were stationary. Models with more than two variables such as multivariate can hold more than one cointegration relationship between the variables ; where in the instance discussed above the ( EG ) attack would be moderately inefficient taking to smallest discrepancy against alternate attacks. Hence the Johansen ( 1988 ) technique of decreased rank arrested development should be used ( Harris and Sollis, 2003 ) . It is applied to this survey to back up the consequences obtained by the EG attack. The method is outlined by Dickeyet Al( 1994 ) . The chief stairss for the process are summarised as follows: –

  • Decision upon the autoregressive orderKfor the theoretical account ;
  • Runing arrested development of DyTon Dyt-1, Dyt-2……Dyt-k+1and salvage the remainders, DTfor each T, DThas n elements ;
  • Arrested development of Dyt-kon Dyt-1, Dyt-2……Dyt-k+1and salvage the remainders, LT. For each T, DThas n elements ;
  • Calculation of square of the standard correlativity between DTand LTcalling these as vitamin D12& gt ; vitamin D22& gt ; …..dN2;
  • Leting N denotes the figure of clip period available in the informations and calculate the ‘trace test’ as:

TRACE TEST = -n( 8 )

The void hypothesis is that thereKor less cointegrating vectors, when k=0, 1 or 2. The hypothesis is tested against a general option.

  • An option of taking the developed upper limit eigenvalue trial:

MAX EIGENVALUE TEST = -N ln ( 1-) ( 9 )

Therefore the void hypothesis k=0 is tested against the option that k =1, and k =1 against the alternate k=2 etc. Both trials should supply coherent consequences. The trial statistics should be so compared to the appropriate tabular array in Johansen and Juselius ( 1990 ) . The six stairss present the mechanism of cointegration trial in which the modern computing machine bundle such as EViews automatically produce the consequences for both trials. Where stationarity arises the cointegration trial becomes unneeded and the Granger Causality trial will be used to measure the extent of relationship between the monetary value series.

  • The Granger Causality Theory

The most popular attack to proving for this phenomenon is the process developed by Granger and Newbold ( 1988 ) . The process involves appraisal of unrestricted equation in which one variableYTis regressed both on its ain lagged value and on the lagged value oftenT.The kernel of the trial lies in look intoing if the lagged valuetenTbetter the account ofYTsupplied by the lagged values ofYTitself ( Greene 2008 ) . If yes sotenTis claimed to granger causeYT. The Granger Causality appraisal utilizing the Vector Autoregression ( VAR ) theoretical account takes the undermentioned signifier:

( 10 )

( 11 )

The arrested development analysis trades with the dependance of one variable on other variable but it does non needfully connote causing. The being of relationship between variables does non turn out causality of way of influence. The premises made are variables are stationary, figure of slowdowns and the mistake footings are uncorrelated if it is appropriate transmutation is necessary. The void hypothesis on no causality takes the undermentioned signifier:

Bing tested against the option that there so a statistical important relationship between the variables that are cointegrated.

The procedure is so repeated with the same variable but the dependent variable takes the topographic point of the explanatory variable one andfrailty vesa.The Granger Causality with MWald trial is another attack for causality trial. The construct by which the causality is understood precedency is based on the thought that a cause can non come after its consequence. In this attack variableTenis said to Granger cause variableYttriumif the current value ofYttrium( YT) is conditional on the past value ofTen( tent-1, tent-2, …..x0) and therefore the history ofTenis likely to assist to foretellYttrium( anticipation for one period in front ) . The construct has been generalised by Dufour and Renault ( 1998 ) to causalityNperiod in front and to causality up to horizon Ns were n is positive whole number that can be infinite. They showed that in a bivariate system no causality for one period in front implies no causality at, or to any skyline. The Granger Causality trial will be tested after the Vector Autoregressive theoretical account appraisal ( Equations 1 and 2 ) while the Numberss of slowdowns included are based on AIC and the invariable is suppressed.

  • Impulse Response Functions

Vector autoregressive ( VAR ) theoretical accounts have become standard tools for economic analyses. Impulse response maps ( IRFs ) and forecast mistake discrepancy decompositions are normally computed from these theoretical accounts in order to look into the interrelatednesss within the system ( Lutkepohl 1990 ) . IRFs hint out the expected responses of current hereafter values of each of the variables to a daze in one of the VAR equations. By enforcing specific limitations on the parametric quantities of the VAR theoretical account the dazes can be attributed an economic significance. The impulse response is besides considered as the way whereby the variables return to equilibrium ( Greene 2008 ) . The utile manner to characterize the system is to plot the impulse response maps. The secret plans precede hints through the consequence on the variables over clip.

Chapter FOUR


  • Descriptive Analysis

The information set constructed was capable to descriptive analysis which consequences to intend of 104.68 US $ per 50 Kg in Kilimanjaro, 90.09 US $ per Kg Mbeya and 86.74 US $ per 50 Kg for Ruvuma with Standard Deviations of 30.66, 33.53 and 30.69 for Kilimanjaro, Mbeya and Ruvuma severally. See table 1:

Table 4.1.1 Descriptive Analysis

KLM ( US $ /50Kg )

MBY ( US $ /50Kg )

RVM ( US $ /50Kg )

















Std. Dev.
























Sum Sq. Dev.








Note: KLM stands for Kilimanjaro ; MBY for Mbeya ; RVM for Ruvuma.

Table 4.1.2 below shows the correlativity of the hebdomadal java monetary values for the three markets Kilimanjaro, Mbeya and Ruvuma.

Table 4.1.2. Correlation Matrix
















The figure below shows the consequences of monetary value motions between the three markets before transmutation to logarithms.

4.2 Consequences for pair wise secret plans

To research the clip series belongingss of the informations brace wise secret plan for each of the markets with Kilimanjaro since Kilimanjaro is the dominant java market and besides a secret plan of Mbeya and Ruvuma. The secret plans were chiefly to look into the monetary value relationships between Kilimanjaro and other markets and the other two markets together. The consequences of the secret plans are shown in figure 3 and 4. The secret plan shows some short tally fluctuations in monetary values in which both Mbeya and Ruvuma shows common tendency with Kilimanjaro where monetary values of Mbeya and Ruvuma are less than monetary values in Kilimanjaro. The monetary value motion show clear indicant that they exhibit clear -movements over clip. The Kilimanjaro and Mbeya secret plan shows besides shows that the Mbeya monetary values from December 2004 to May 2005 and December 2006 to May 2007 were higher than Kilimanjaro monetary values. The secret plan of Kilimanjaro and Ruvuma shows the similar tendency as in Mbeya but monetary values in Ruvuma being much lower than in Mbeya and with monetary values higher than Kilimanjaro in December 2005 and October 2006.

4.3The consequences for Unit Root

The variables were ab initio tested for the unit root before change overing them into logarithms and the consequences showed that theTstatistics were non significantly negative which imply that the variables are non stationary. The variable were so converted into logarithms and so tested for unit root in which the consequences showed that the variables are non stationary. The variable are so differenced and tested once more and the consequences of ADF trial for three series are presented in table 4.3.1 – 4.3.3 with their account and equations underneath.

Table 4.3.1: ADF trial consequences for DINKLM

Null Hypothesis: DINKLM has a unit root

Exogenous: Changeless, Linear Trend

Lag Length: 0 ( Fixed )


Prob. *

Augmented Dickey-Fuller trial statistic



Test critical values:

1 % degree


5 % degree


10 % degree


*MacKinnon ( 1996 ) nonreversible p-values.

The ADF trial statistic,tauis -13.5585 shown asT-statistics of the differences of the logarithms of slowdown of monetary values in Kilimanjaro, DINKLM ( -1 ) , in the arrested development end product (see table A1 in appendix 1).Thereforetausignificantly negative since it more negative than the 10 % critical value of -3.1482 and we reject the void hypothesis of a unit root in DINKLM and accept the option that it is stationary.

The equation for Kilimanjaro clip series took the undermentioned signifier: ( elaborate end product consequences are intable A1 inappendix 1)

DINKLMT= 0.0149 – 0.0001T– 1.2065DInKLMt-1+ vitamin ET( 11 )


DINKLMT– First difference of the KLM monetary value variable,

DInKLMt-1– First difference of the KLM monetary value variable lagged by one period.

Figure 4.3.1: Stationarity secret plan for DINKLM

Table 4.3.2: ADF trial consequences for DINMBY

Null Hypothesis: DINMBY has a unit root

Exogenous: Changeless, Linear Trend

Lag Length: 0 ( Fixed )


Prob. *

Augmented Dickey-Fuller trial statistic



Test critical values:

1 % degree


5 % degree


10 % degree


*MacKinnon ( 1996 ) nonreversible p-values.

The ADF trial statistic,tauis -14.2298 shown asT-statistics on the on the differences of the logarithms of slowdown of monetary values in Kilimanjaro, DINMBY ( -1 ) , in the arrested development end product (see table A2 appendix 1).Thereforetausignificantly negative since it more negative than the 10 % critical value of -3.1482. Based on the big negative oftaustatistic we reject the void hypothesis of a unit root in DINMBY and accept the option that it is stationary.

The equation for Mbeya clip series took the undermentioned signifier: ( elaborate end product consequences are intable A2 inappendix 1)

DINMBYT= 0.0086 + 1.08E-05T– 1.2524DInMBYt-1+ vitamin ET( 12 )


DINMBYT– First difference of the MBY monetary value variable,

DInMBYt-1– First difference of the MBY monetary value variable lagged by one period

Figure 4.3.2: Stationarity secret plan for DINMBY

Table 4.3.3: ADF trial consequences for DINRVM

Null Hypothesis: DINRVM has a unit root

Exogenous: Changeless, Linear Trend

Lag Length: 0 ( Fixed )


Prob. *

Augmented Dickey-Fuller trial statistic



Test critical values:

1 % degree


5 % degree


10 % degree


*MacKinnon ( 1996 ) nonreversible p-values.

The ADF trial statistic,tauis -17.5730 shown asT-statistics on the on the differences of the logarithms of slowdown of monetary values in Ruvuma, DINRVM ( -1 ) , in the arrested development end product ( seetable A3 i


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