Financially Suppressed Economy

IndoMarketStationWagonMost smallholder farmers in developing countries operated in what might best be described as low-income or financially-suppressed economies. This is easily understood by noting the typical expatriate advisors’ monthly salary will equal their host annual salary, as shown in the figure. As a result, the cost of living is also low. An example is the consumer price of tomatoes in Katmandu being only 1/5th the cost in the USA which could be triple the nominal farm gate price as illustrated under Private Traders page. A more detailed example would be the comparison of consumer commodity prices between Tanzania and the US as shown in the table. However, even with this low cost of living, income can be even more suppressed resulting in the percent of income required to meet essentials being very high and approaching 80% of income including the subsistence production of smallholders. This leaves a very limited base for discretionary purchases of simple comfort items such as oil lamps, bicycles, and an occasional cold drink. Discretionary funds also defined the maximum tax base the government has to generate the revenue it needs to provide essential civil services without relying on donor funds. In the US and other developed countries with only 15 to 20% of income required to meet food essentials the discretionary income and tax base can be as high as 80% of income. In contrast in developing countries with 80% of income going for food and essential and only 20% discretionary and taxes, the tax base is virtually non-existent as shown in the figure above.RelativeIncomeOpt

An overall financially suppressed economy has major impact on the business environment as well as the tax base for supporting public services. Some of these impacts are:

  1. Very low profit margins for private sector businesses greatly reducing the degree small business such as private village based family enterprises can exploit the smallholders they serve.
  2. Government setting ceiling price policies for staple commodities like rice and maize in order to maintain affordable food price for the urban poor.
  3. Farmers responding to the reduced economic incentives by reducing their level of management for the staple crops and accepting lower yields, or shifting to illicit cash crops. This can result in food insufficiency and major expenditures of foreign reserves on food imports or food aid. However, the farmers are most likely operating at the economic optimal as determined by the suppressed price policy. One unintended impact could be the suppressed ceiling price for wheat in Afghanistan could encourage poppy production. Both are winter crops.Tanzania
  4. Heavy dependency of import and export duties to finance government, resulting in high cost of imported goods, including those essential for economic development such as agriculture equipment, spare parts, and fuel.
  5. This can result in deferred maintenance over preventative maintenance and some very rickety, overloaded, unsafe vehicle operating on the highways, as depicted, but it may represent the economic optimal maintenance for the economic suppressed environment.
  6. Since taxes have to come from discretionary spending the suppressed economies result in a very low tax base for the government to provide essential civil services that often results in governments that are Financially Stalled.

It should also be noted that the prices in the table are consumer prices in Mbeya, a major city in Southern Tanzania. The farm gate prices will then have to be discounted for the cost of getting the produce from farm to city. In doing so please note that fuel prices, as a major component of transport cost, and most likely imported spare parts are at a primum to the USA prices, but perhaps comparable to European prices. This will further suppress what the farmer actually receives for his produce. Additional, Comparison of Consumer Prices between the USA and various countries in Asia, Africa, the Middle East and South America.

An appreciation for the degree of financial suppression of an economy can impact the long term post funding sustainability of development efforts as well as the effectiveness of any capacity building of civil services.