MUCH of government policy in Tanzania is targeting recovery. We shouldn’t forget, however, that even when the economy was growing rapidly, the growth profile remained jobless and barely sustained. Over three quarters of Tanzanians remained stuck in low productivity subsistence agriculture.
A few Tanzanians who escaped subsistence and joined commercial farming, industry and formal services, prospered. This led to rising inequality to the extent that the richest 20% of Tanzanians shared half of the national income, while their poorest contemporaries shared less than 10% of the same.
Since Tanzania’s growth has been happening in low productivity sectors, particularly informal services, it didn’t create jobs. We heard from authorities how growth was robust as joblessness, particularly among educated young Tanzanians, joblessness increased to the point where one job had 700 qualified applicants. Did we learn any lessons?
Economics teach us that transformation occurs when production and employment shift from agriculture and other primary sectors( such as mining) to manufacturing and finally to services in that order.
Empirical researchers have always told us that “all countries that transformed their economies have done so by industrializing”. We seem to have jumped from agriculture to services. Yet, services have never acted as an escalator sector. Why?
First, services such as information technology require high skills- long years of education and institution building are required before farm workers can be transformed into programmers or cell center operators.
Second, services are less tradable(less exportable) with same exceptions such as cell phones and tourism. Tanzania’ s growth is driven mainly by non-tradable activities (things we do not export); construction, mobile telephone and education and health services.
MOTIONLESS MANUFACTURING SECTOR
If you engage in non-exportable activities your capacity to create jobs is limited since you are relying on the low domestic demand, it is self vulnerable to internal political business cycles and other shocks- macro economic shocks, weather, demographic changes etc.
Although it would be wrong to think that the past will necessarily look like the future, I wouldn’t want to think that Tanzania, or Africa in general, will be the first to reinvent the wheel. If we want to transform our economy we are going to do so by investing in manufacturing.
It had been motionless at about 8% of Gdp for the past 40 years. Its share in total employment has also been slack at 6%. It has been left to SMEs that make up 94% of firms operating in the manufacturing sector.
Empirical research shows that industrial upgrading has never happened through market forces. The market gave all industrialized countries ambiguous signals that they should not promote the industries they dominate today.
CARROT AND STICK
When Toyota’s attempt to export its first passenger cars to the US in 1958 flopped, many Japanese economists argued that the country should stop subsidizing the “wrong industry”- car manufacturing-and stick the silk.
Imagine what would be today had the Japanese government listened to those economists! Imagine a world without Toyota. The same can be said of Samsung and Hyundai( South Korea), Nokia(Finland) and many others.
Turning to Tanzania, manufacturing sector faces a number of constraints but research shows most of them are symptoms of the following diseases;
First, the generic policy framework without practical coordination and linkages among government ministries, departments and agencies(MDAs) involved in Tanzania’s industrialization agenda.
Tanzania’s MDAs are more obsessed with mandates and budgets(the means) instead of focusing on the end. To solve this, government must restructure itself. Currently, coordinating authorities such as the office of Prime Minister are ineffective and powerless.
They should be empowered to use both carrot and stick for different behaviours. Our government must learn to sack people who fail to deliver, and reward performers. Agencies that fail to perform should be closed instead of creating parallel ones to circumvent the non-performing ones.
Most importantly, leaders must understand that policy documents alone will not industrialise Tanzania. We shall need to act and learn from the mistakes and failures.
For example, now that governance at the Tanzania National Corporation(NDC) has been strengthened with a new board, let government fund it’s investment arm.
The economic ideological dogma that used to worship markets and private sector-led models as if they were magical wands has been globally disproved.
Any well- meaning person now agrees that the state, despite its shortcomings(popularly preferred to as government failures) has a role to play particularly when it comes to experimenting industries where private sector is disinclined.
The past three decades must also have taught us that a number of market failures impeded industrialization. Information externalities, for examples, are everywhere for us to notice. Markets are sending wrong signals to entrepreneurs- invest here, not there; yet they should have invested there, and not here.
REDUCE ‘LEARNING COSTS‘
To solve this, government must reduce ‘learning costs’ for private sector. The learning process for manufacturing is too long and often involves huge financial losses. That is why private sector has avoided manufacturing(both as an investment and financing area).
Let us use NDC to experiment industries with uncompetitive cost structures. Once the private sector is assured of a return on investment, it will not wait for invitation or “facilitation”.
Since in today’s globalized world it is no longer practical to use conventional industrial policy instruments- such as tariffs, exchange controls, and import licencing -to nurture infant industries, we should use NDC to incubate these industries with view of passing the mature industries on to private sector.
In principle, although private firms, not state-owned enterprises, must be the engine of industrial production and management, the state should directly invest in the experimentation stage of industries-iron and steel, petroleum, agro-manufacturing, and other export-oriented manufacturers.
Another reason I need the state to invest directly in manufacturing is because, research shows, decision making in industry should not be based on cost-benefit analysis. Why? Industries take long to mature into profit-making entities.
Some of them actually never mature into profit-making entities, but serve other development functions particularly keeping per capita incomes and employment growing.
AMELIORATE TAX REGIME
To accelerate industrialization, government will need to do a few things; first, it should directly provide low interest loans ( not handouts) to industrialists, particularly those investing in manufacturing. The song of capitalising Tanzania Investment Bank(TIB) without walking the talk should stop.
The hundreds of billions being squandered in handouts and piecemeal interventions across MDAs should be consolidated and put in TIB and NDC.
Secondly, we should ameliorate tax regime such that indigenous industrialists have advantage over importers. Currently, import trade is more profitable than manufacturing. Every year the government technocrats lament about import bills but their government is not doing anything practical to stop it.
We need to establish why Tanzanians with investable capital are into import trade and construction of non- tradables such as shopping malls, apartments and speculating on land. The tax regime is one tool we may use to turn the odds against these activities and in favour of manufacturing, tourism and commercial agriculture.
Thirdly, we need to contain state incentives for private sector to productivity and export discipline, using both carrot and stick for different behaviours. After a responsible period, the state should withdraw support from firms that cite small domestic market as an impediment for their growth.
LEARN BY DOING
In all countries where industrial policy succeeded, the state forced the private firms to export. This forces firms to be competitive in international markets as a metric for determining those that deserve state help.
Third, and related to the second, there is a need for a clear guidelines or criteria for accessing exemption schemes, duty- drawbacks and export processing zones for manufacturers. This will help to screen out rent-seekers and thus reduce adverse-selection problem( attracting “bad”/ fake investors).
Fourth, there is a need to expedite the enactment of competition law and other antitrust laws to enforce competition. We shall not build the economy, let alone industry, when we let cartels to roam freely.
Prices of fuel, inputs, such as cement, bank money and utilities will always be a problem for investors as long as there is no law that compels them to compete, instead of colluding.
Lastly, let us learn to implement. Everywhere they learn by doing. They also improve by punishing conscious poor performance and rewarding good performance. In Tanzania, we have built a culture that people cannot only get away with avoidable mistakes, but get rewarded for adding no value. Which incentive mechanism is this?