Jump to ContentJump to Main Navigation
Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

Show Summary Details
Page of

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 08 April 2020

Industrial Development in Tanzania

Industrial Development in Tanzania

Chapter:
(p.155) 8 Industrial Development in Tanzania
Source:
Manufacturing Transformation
Author(s):

Jamal Msami

Samuel Wangwe

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0008

Abstract and Keywords

Tanzania’s industrial sector has evolved through various stages since independence in 1961, from nascent and undiversified to state-led import substitution industrialization, and subsequently to deindustrialization under structural adjustment programmes and policy reforms. The current development agenda, however, has brought industrial development back to be one of the policy priorities. This chapter aims at examining the performance of the manufacturing sector, with particular interest in identifying the emerging manufacturing sub-sectors, the drivers of their success, and challenges for sustained competitiveness. The growth in manufacturing notwithstanding, it remains largely undiversified, and vulnerable to variations in agricultural production and commodity prices. The most dynamic sub-sectors in terms of output growth, export growth, production innovation, and product diversity are food products, plastic and rubber, chemicals, basic metal work, and non-metallic mineral products.

Keywords:   Tanzania, industrialization, policy reform, structural adjustment programmes, manufacturing sector, export growth

8.1 Introduction

Policy debates on various economic development theories have argued for the gradual transformation from primary production to tertiary production as essential both in the allocation of limited resources and in the realization of gains from trade. Relative to Africa, such debates have often pointed out the inadequacy of industrialization on the continent.

The performance of Africa’s industrial sector in terms of growth, structural change, and absorptive capacity has historically lagged behind that of other regions. Subsequently, Africa’s terms of trade have fared no better relative to the rest of the world (the Prebisch-Singer hypothesis).

In Tanzania, industrialization has been characterized by shifts in roles of the state and private sector: starting with largely private sector driven industrial development up to the mid-1960s as reflected in the First Five-year Development Plan (1964–9), shifting to largely state driven industrial development from 1967 to the mid-1980s as reflected in the Second and Third Five-year Plans (1969–74 and 1976–81). It shifted back to private sector driven industrialization after 1986 as reflected in the Economic Recovery Programme (ERP) of 1986–9 and the Economic and Social Action Programme of 1989–92 in which liberalization and privatization were practised followed by initiatives to revert back to industrialization as a development agenda from the mid-1990s as indicated in the Sustainable Industrial Development Programme of 1996–2020 and the Integrated Industrial Development of 2011.

8.2 Historical Developments: Pre-independence Period

In the colonial era, the primary focus of manufacturing in Tanzania was on primary, low value, labour-intensive agricultural goods. Before the First World (p.156) War (WWI) German colonizers established a company called the German East Africa Company in mainland Tanzania. The economic performance of the colony was awash with potential and prior to the beginning of WWI the company’s exports were twice as high as those of British East Africa which operated in the neighbouring British colony of Kenya. As a result of constraints posed by the financing of the war and the associated production and trade interruption, the German East African company performance suffered, as the colony could not produce for outside markets. Consequently, there were no imports, and industries which produced goods for military purposes experienced higher growth levels.

Following the signing of the treaty of Versailles in 1918, Tanganyika (now a British dominion) saw pronounced structural changes in domestic production in favour of capital, intermediate, and consumer goods from abroad. Under the British, local investment in the manufacturing sector was further discouraged in spite of its already low levels. In the latter years of British dominionship, particularly after the Second World War (WWII), the industrial sector began to receive concerted attention from the then administrators; efforts started to be put into the production of primary products such as cotton, sisal, and tobacco for export and replacing imported ones. However, in the absence of developed supply chains and networks, partly a deliberate mechanism designed to impose foreign rule over Tanganyika, local peasants did not reap the benefits of these changes in public policy.

The Tanzanian industrial sector continued to operate poorly and slowly because most foreign investors preferred investing in Kenya where there was better capital and physical and administrative infrastructure. In addition, the nature of the common external tariff policy (whose structure favoured the interests of Kenyan industrialists) for the then East African countries (Tanzania, Kenya, Uganda) was instrumental in marginalizing the development of local industries via the promotion of centre–periphery relations between the British colony of Kenya and the Tanganyika dominion.

The pervasive lack of indigenous investors (and ‘captains of industry’) further exacerbated the lack of growth and expansion of the industrial base. Other marginalizing traits of the local economy at the time such as small market size, low agricultural productivity, high illiteracy, and continued focus on low-skill labour-intensive agricultural production, contrived to undermine the development of an industrial base in the country. However, in the late 1950s there was an increase in the pace of industrialization in the country because of unstable political conditions in Uganda and Kenya which encouraged some investors to divert their attention to Tanzania. In spite of this, growth of the local industrial base failed to match Kenya’s (RPED 1994).

As a consequence of policies under British dominionship, production activities at independence in 1961 in Tanganyika (now Tanzania) were extensively (p.157) rooted in labour-intensive primary commodities. There were 220 manufacturing industries which employed 200,000 out of 9 million people (Skarstein and Wangwe 1986) which could meet just about 1 per cent of families. The industrial sector contributed about 4 per cent to GDP. Productive factories in drinks, agro-processing, and consumables such as Coca-Cola, East African Breweries, Tanganyika Packers, British American Tobacco, Metal Box, and Bata shoes, and even smaller companies, which existed at the time of independence, were under foreign ownership. Many of these large-scale companies produced either for urban consumption or for export while small-scale ones catered for rural markets.

A nationwide census of industries in 1961 established that 62 per cent of the seventy-six large-scale enterprises operating at the time in the then Tanganyika worked below full capacity on account of insufficient demand, unfavourable weather conditions, poor infrastructure, breakdown, shortage of skilled labour, and inefficient utilization of raw materials (Szirmai and Lapperre 2001). It is thus conceivable that the colonial era institutional set-up coupled with unreliable infrastructure, a high degree of unskilled citizens, poor technical skills and human capital, poor managerial capabilities, insufficient energy, lack of indigenous entrepreneurship, and a small domestic market for industrial goods hampered growth of the industrial sector in Tanzania.

From a policy setting, industrial development in Tanzania can be grouped into five distinct policy periods: 1961–9, 1969–81, 1981–6, 1986–95, and 1995 to date. Section 8.3 will systematically explore these periods in chronological sequence.

8.3 Industrial Development, 1961–85

In the early 1960s, the national economic agenda focused on growth with little attention to structural change or ownership. The colonial pattern of import substitution industrialization (ISI) was continued (largely processing and simple consumer goods). The Foreign Investment Protection Act of 1963 was designed to attract foreign direct investment (FDI) to fill the capital gap. Response was not encouraging and as a result the Arusha declaration was formulated: socialism and self-reliance from 1967.

8.3.1 Industrial Development in the Early Post-independence Period, 1961–7

Between 1961 and 1967, industrial development in Tanzania was defined by the introduction of the three-year development plan (TYP) for 1961–4 and the First Five-year Plan (FFYP) for 1964–9. The TYP aimed at promoting growth (p.158) mainly through increasing investment in those activities that were expected to bring quick and high returns. A relatively low degree of regulatory control was exercised to promote private domestic and international investment in the economy. Against the tide of recently independent countries espousing left leaning economic and political ideology, the government of the young nation of Tanganyika moved to allay foreign and private investors’ concerns on property nationalization during the TYP. Tax incentives were provided and existing investment opportunities published in a bid to expand the pool of capital flows. The TYP was successful in promoting basic consumer goods processing industries through the incentives outlined as well as providing a public injection of funds from the government through the Tanganyika Development Corporation. This period also saw the first active state promotion of the ISI strategy.

Under the TYP manufacturing units started to increase in numbers as did the level of output. In 1965, there were 569 manufacturing establishments employing ten persons or more of which over one-third came into existence after independence. Elements of ISI and diversity were noticed in some activities, for instance, in the metal and products industry which up to late 1958 produced only metal containers; diversification of the products portfolio was introduced in 1965. These included aluminium sheets, screws, nails, wire, enamelware, and razor blades (Rweyemamu 1973). In addition, ISI took place in paper, glass, printing, and wood products.

Table 8.1 Inter-East Africa trade, 1962–4

Year

Exports from Tanzania to

Imports of Tanzania from

Kenya

Uganda

Kenya

Uganda

1962

56

9

207

35

1963

62

10

216

42

1964

87

20

271

49

Note: In Tsh. millions.

Source: Adapted from Rweyemamu (1973).

However, despite commensurate gains in manufacturing, the level of industrial output remained comparatively low. In 1966, the industrial output share in total production was only 6.6 per cent, below the expected level of 10 per cent (Rweyemamu 1973) despite the exceptionally high growth rate of the industry. The country’s terms of trade with its East African neighbours remained unimpressive with recorded episodes of current account deficits between 1962 and 1964.

Regional trade imbalances (as seen in Table 8.1) led to negotiations between Tanzania and its neighbours and the eventual signing of the Kampala agreement in 1964 aimed at restructuring the distribution of industries across the (p.159) East African region to attain a degree of equity among the nations. Ownership of means of production however remained firmly entrenched in foreign hands such that by 1965, an overwhelming majority of the industries set up prior to and during the TYP remained in foreign hands (Rweyemamu 1973). During the TYP employment fell, with gradual transformation of the structure of industries from labour to capital intensity. Foreign owned companies concentrated on the capital intensive production of such items as non-metallic mineral products, repair of machinery and manufacture of metals and metal products, tobacco, textile, cement, radio assembly, diamond cutting, etc.

The FFYP succeeded the TYP in 1964 and provided the roadmap for shaping the industrialization of Tanzania for the next five years. The FFYP aimed at increasing the relative importance of the manufacturing sector through placing greater emphasis on production of substitutes for already imported goods. In the grand scheme of things, the FFYP was an extension of the TYP with a shared outcome. Under the FFYP, market size (economies of scale) and availability of capital were identified as major constraints hindering the expansion of the industrial sector. An amendment to clauses in the East African common market soon followed as states attempted to gain more independence on trade policy and regulation. This allowed the government to set conditions for investment in its industries which did not depend on the regional market by introducing a transfer tax system aimed at protecting weak industries.

The TYP and FFYP shared a similar focus for their goals. Both shared the broad perspective objective altogether by 1980 of raising per capita incomes from TShs 392 to over TShs 900, attaining full self-sufficiency in trained manpower in all economic fields and at professional levels, to increase the number of wage earners from 340,000 in 1960–2 to 800,000, and raising life expectancy from thirty-five to fifty years.

Success of the FFYP plan can be seen from the changes that took place within its duration. The gradual success of these two industrial policies achieved a 50 per cent increase in the number of manufacturing establishments between 1961 and 1965 in addition to increasing the ratio of manufacturing value added to GDP and labour productivity. Official statistics indicate that the GDP share of manufacturing value added increased from around 8.4 per cent in 1964 to 10.2 per cent in 1967 (BoT 1982; Bureau of Statistics 1978). This was also accompanied by an increase in comparative and general labour productivity between 1965 and 1967.

Tanzania’s ideological shifts in the latter half of the 1960s led to an adverse appraisal of both the TYP and FFYP over their failure to promote local ownership of means of production. This led to criticism from party stalwarts over the distributive effects of the two policies. The failure to promote a product mix (p.160) under the TYP and FFYP had hindered diversification and slowed down broadening of the domestic industrial base. This, along with the low degree of direct regulatory control which defined the economy and the conflicted political ambitions of the ruling elite, prompted a revision of policy.

8.3.2 State-led Industrial Development, 1967–85

The period from 1967 saw the inauguration of the national policy for nationalization and self-reliance: the Arusha declaration. Promulgation of the Arusha declaration in 1967 fired the fight for principles of socialism and self-reliance on major means of production. The Arusha declaration advocated utilization of local resources as primary endowments in production, and in effect signalled the end of low level direct regulatory control and the reliance on foreign private investors. Nationalization of large foreign owned enterprises ensued as did the expansion of the public sector. Increased state control in manufacturing saw the introduction of an industrial licensing procedure under the National Industries Licensing and Registration Act of 1967. The Arusha declaration introduced state-led ISI, state-led expansion of manufacturing, and a revision of ownership and management of established entities in favour of direct ownership and management of state organizations. Foreign ownership of production was subsequently limited to joint ventures with the government. Foreign investors participated through management agreements and as suppliers of equipment for industries. Direct regulatory control in manufacturing was then consolidated through establishment of the National Development Corporation while trade was largely operating under the State Trading Corporation (STC).

The Second Five-year Plan (SFYP) of 1969–74 attempted to bridge the disconnection between industrial development and rural development through nationalization of the internal wholesale trade in 1971. This forced manufacturers to sell specified goods to and purchase inputs from the STC.

Table 8.2 Production by selected industries

Industry

Units

1963

1964

1965

1966

1967

1968

Textiles

’000 sq yds

6,225

8,930

12,126

17,121

18,277

34,519

Beer

’000 gallons

1,962

2,249

2,673

4,139

5,120

5,413

Cigarettes

millions

1,144

1,535

1,869

2,049

2,044

2,137

Paints

gallons

95,357

96,981

162,573

221,020

274,623

317,948

Plywood

’000 sq. ft

2,004

6,573

7,794

10,247

8,808

10,658

Sisal twine

tons

-

658

5,778

10,138

14,887

16,454

Saw milling

’000 cu. ft

3,676

4,675

5,029

5,026

4,585

5,029

Wheat flour

tons

28,378

29,818

38,433

39,714

41,159

42,238

Pyrethrum extract

tons

99

107

174

200

287

187

Canned meat

tons

n/a

n/a

11,109

9,162

9,520

6,716

Cement

tons

-

-

-

49,324

144,612

153,894

Source: Adapted from Rweyemamu (1973).

This led to a decline in the size of the private sector and an increase in the number of publicly owned establishments. By 1973, the public sector’s contribution to GDP had risen to 32 per cent from 5 per cent in 1966 (Szirmai and Lapperre 2001) and in 1973 accounted for 46.7 per cent (up from 15.5 per cent in 1967) of all total manufacturing employment (Skarstein and Wangwe 1986). Overall, industrial production increased between 1963 and 1969 (Table 8.2).

The increased role of the state in this era was accompanied by an increase in GDP share of manufacturing as well as gross manufacturing value added. Between 1967 and 1973, Tanzania recorded the most rapid growth of manufacturing value added (for enterprises employing ten or more personnel) in its history. It is worth noting that this increase in the contribution of (p.161) manufacturing also coincided with an increase in both absolute and relative labour productivity.1

The Arusha declaration also saw an increased role of government in setting, implementing, and monitoring monetary and exchange rate policies. In 1971, the National Price Control Advisory Board was created to set and oversee prices initially of a limited number of manufactured products (Maliyamkono and Bagachwa 1990). The Price Control Act of 1973, aimed at limiting the monopoly pricing power of domestic producers, allowed the government to exercise full price control in the manufacturing sector (Mongi 1980). Stringent regulations were introduced to monitor the flow of capital in and out of the country. The 1973 Finance Act gave the government carte blanche in administration of the foreign exchange market and led to an appreciation of the real exchange rate vis-à-vis that of Tanzania’s trading partners as a result of rising domestic inflation and exchange rate rigidity. The artificial overvaluation of the nominal exchange rate precipitated by controls established by this act led to the proliferation of the parallel exchange market characterized by rates roughly double the nominal rate between 1971 and 1973. With insufficient foreign earnings from trade in goods and services, this led to a shortage of foreign currency (Lipumba and Kasekende 1991) a feature symptomatic of Tanzania’s economic woes of the era.

The global oil crisis of 1973 further exacerbated the shortage of foreign exchange necessary for the importation of capital and intermediate goods. Declining productivity levels and consumption contributed to a fall in consumer goods to 30 per cent of output in 1973 compared to a peak figure of 43 per cent in 1963. The country experienced deteriorating balance of payments (p.162) which adversely affected industrial production between 1973 and 1974 (Skarstein and Wangwe 1986).

By the early 1970s, the increase in manufacturing had succeeded in meeting 70 per cent of domestic demand for consumer goods and improved clothing exports, but failed to improve the absorption capacity of technology transfers. These shortcomings prompted the launch of discussions to chart a long-term industrial strategy covering twenty years (1975–95). The twenty-year basic industry strategy was devised to improve the nation’s industrial base to implement plans towards achieving national goals. The guiding national goals were growth, structural change, employment, income distribution, regional distribution, worker participation, and self-reliance. This long-term strategy2 aimed between 1975 and 1995 at increasing the relative importance of the manufacturing sector and reducing dependence on imports so as to achieve the seven national goals which were identified as relating to increasing industrial growth, structural changes, employment generation, income distribution, regional distribution, workers’ participation, and self-reliance. The basic industry strategy was adopted for its score on structural change and self-reliance. Industrial goods were to meet the basic needs of the population and intermediate and capital goods in the economy. The latter was to be achieved through efficient utilization of domestic natural resources to produce a wide range of intermediate and capital goods. Industrial production was primarily meant to meet domestic demand. Exports were to result from an expansion of the domestic market. Manufacturing was projected to grow from 8 per cent of GDP in early 1975 to 18.8 per cent in 1995.

Meanwhile, the economy was experiencing an accelerated pattern of diverse industrialization. Records show that in 1977 the share of consumer goods in manufacturing value added fell to 74 per cent from 54.2 per cent in 1961, while intermediate and capital goods had increased from 23 per cent to 34.5 per cent and from 3 per cent to 11.8 per cent respectively (Skarstein and Wangwe 1986).

(p.163) This marked a gradual evolution of industrial activity under the ISI strategy from the production of simple consumer goods to intermediate and capital goods. Unfortunately, the aftershocks of the 1973 oil crisis and a subsequent recovery of world coffee output (following a bout of frost in Brazil in 1976) led to a fall in international commodity prices and increased the price of domestic consumer goods and inputs. The government was then required to spend more to procure goods from outside, exerting additional pressure on foreign exchange reserves already affected by falling export receipts. Consequently, in the early 1980s, labour productivity was reduced and the economy continued to deteriorate as agricultural production failed to cater for domestic food demand.

The 1973 crisis increased the current account deficit relative to GDP to 14.3 per cent in 1974 from 6.5 per cent in 1973. Worsening balance of payment accounts were further compounded by a simultaneous rise in inflation from 7.6 per cent in 1972 to 27 per cent in 1975. A brief respite in 1976 and 19773 brought about by a combination of policy responses and the coffee boom of 1977 was however short lived, as the 1977 collapse of the East African Community (EAC), the second oil crisis of 1979, the Kagera war with Uganda (1978–9), severe droughts, and deteriorating terms of trade resulted in an upshot of current account deficit to 12.7 per cent of GDP (Bigsten et al. 1999).

An acute shortage of foreign exchange and consumer goods contributed to a thriving parallel market with inflation increasing to 30.3 per cent in 1980. Overall, macroeconomic growth came to a halt in 1981 with a negative real rate of growth recorded at −0.5 per cent by the end of the year, followed by a close to zero rate in 1982, and another year of negative growth in 1983 (Table 8.3).

In 1981, an Export Rebate System (ERS) was introduced to serve as an export subsidy for producers of horticultural goods, alongside a General Retention Scheme (GRS) for exporters to deposit part of their foreign exchange earnings for the purpose of importing inputs. The conditions were still not satisfactory and the mid-1980s marked the period of economic deregulation for Tanzania. The National Economic Survival Programme (NESP) came into existence in 1981–2 with the aim of reviving the economy using the nation’s internally generated resources. It did not achieve its goals and the economic malaise continued well into the 1980s.

Table 8.3 Macroeconomic indicators in Tanzania, 1970–92

Year

Annual GDP growth

Inflationb

Current account ratio to GDPc

Terms of trade (1987=100)c

Debt/GDP (%t)c

1970

4.0

3.1

−3.1

n/a

n/a

1971

3.5

5.0

−8.0

n/a

n/a

1972

6.3

7.6

−4.6

n/a

n/a

1973

2.8

10.6

−6.5

145.7

34.2

1974

1.3

18.4

−14.3

173.6

43.1

1975

5.1

27.0

−9.5

142.0

48.3

1976

6.1

6.9

−1.3

151.7

56.2

1977

0.4

11.4

−2.3

182.0

60.5

1978

2.1

6.6

−12.7

151.9

62.2

1979

2.4

12.9

−8.8

138.7

64.3

1980

3.0

30.3

−11.4

142.0

65.0

1981

−0.5

25.7

−7.7

129.0

58.3

1982

0.6

28.9

−8.7

127.1

55.4

1983

−2.4

27.1

−5.5

128.0

64.1

1984

3.4

36.1

−7.4

131.0

77.2

1985

4.6

33.3

−6.6

126.1

74.0

1986

6.6

32.4

−8.1

140.5

123.6

1987

5.9

30.0

−16.1

100.0

211.4

1988

4.8

31.2

−11.6

107.2

188.0

1989

2.2

30.4

−10.5

103.2

171.1

1990

7.1

35.9

−12.5

92.6

202.1

1991

2.8

28.8

−11.9

93.8

188.5

1992

1.6

21.9

−12.2

84.7

210.9

Source: aBureau of Statistics (1978); bBoT (1982); cBigsten and Danielsson (1999); Edwards (2012)

Later the government adopted a structural adjustment programme (SAP) for the period 1982/83–1984/85 to improve the availability of foreign capital inflows but again was unsuccessful because the government could not agree with International Monetary Fund (IMF) conditions. The decline in output (p.164) and productivity was arrested in 1984 and later stabilized between 1984 and 1989. However, the comparative levels of labour productivity continued to fall in Tanzania relative to those of developing economies in Asia such as China, India, and Indonesia (Timmer and Szirmai 2000).4

Several factors can explain this decline in productivity and output. First, protection through import licensing, exchange controls, and price controls based on the cost-plus principle did not create a business environment that could induce industries to build capabilities to compete. Second, foreign exchange earnings were overestimated, the rate artificially sustained at high levels, and actual production was constrained by a shortage of foreign exchange especially that associated with importing intermediate goods. A corollary of this was widespread capacity underutilization and shortages of foreign exchange leading to the shortage of intermediate inputs. Third, human resource skills fell below requirements, a direct consequence of failure of the industrial strategy to fully encapsulate them.

(p.165) 8.4 Industrial Development under Structural Adjustment, 1986–95

The coming into force of the ERP in 1986 ushered in a transformation of the economy from one being wholly state-owned to one involving private ownership of production processes. ERP was adopted with the objective of restoring economic stability and accelerating structural reforms in order to create a sustainable position of the country’s balance of payments, correcting budget deficits, cutting down inflation, reforming the microeconomic framework of policies, and increasing incentives to agricultural producers. The government focused on linking agriculture and the private sector by improving agricultural production and encouraging private sector participation in agricultural marketing and to increase reliance on market forces in order to improve investment in agriculture. To support the functioning of ERP to reach its goal, the government established in 1987 the Tanzania Industrial Research Development Organization (TIRDO), with the intention of conducting industrial research and offering consultancy services to industry. TIRDO was formed with expectations to promote technology utilization and use of local resources.

Trade sector reforms, based on adjusting the exchange rate to promote exports, adjusting tariffs, and liberalizing internal trade, soon followed under ERP. The ERP included various other reform packages aimed at promoting output and facilitating trade including agricultural policy reforms,5 monetary, credit, and financial policy reforms, civil service reform, social services sector reform, Parastatal restructuring, and privatization. During programme implementation, the government adopted a crawling peg exchange rate regime (1986) in an attempt to depreciate the overvalued domestic currency (Ndulu 1987).6 This caused the nominal exchange rate to depreciate over the next years. A relaxation of exchange controls increased access by import starved manufacturers through the availability of the raw materials and spare parts necessary for improving capacity utilization.

Although the reforms were defined and well understood there were arguments against them. It was believed that they were a threat to many activities that were run by the government as well as to their employees. The reforms were also opposed because they were suspected of benefiting few capitalists thereby creating big differences among people in society. The World Bank carried out a Formal Sector Industrial Survey in 1989 to evaluate the impact of (p.166) the reforms on the growth of output and structure of the industrial sector since the mid-1980s; findings showed that overall industrial performance had improved during the ERP period. The 7 per cent (p.a.) decline in manufacturing GDP between 1979 and 1986 had been reversed so that it grew by 5 per cent (p.a.) between 1986 and 1989 (World Bank 1991).

The ERP was marked with an increasing trend in capacity utilization of the private sector in the textile industry which was accompanied by a reduction in the level of activities sponsored by the state. This postulates that the economy was really shifting from public to welcome private investment.

Table 8.4 Average capacity utilization rates in the textile industry in Tanzania: A comparison of public and private firms

Year

Public

Private

1980

57.6

16.9

1981

55.6

27.8

1982

47.4

31.3

1983

34.4

18.2

1984

33.0

16.5

1985

27.1

25.0

1986

23.3

28.2

1987

15.9

63.7

1988

13.7

71.1

1989

16.2

72.8

1990

16.3

58.1

Source: Adapted from Bagachwa et al. (1992).

Table 8.4 reveals that up until 1985, textile establishments that were publicly owned performed better than those which were privately owned. This could have been as a result of the government’s emphasis on use of the economy’s own resources to bring growth into the industrial sector while putting restrictions on elements of private ownership.

In 1990, the ERP was replaced by the Economic and Social Action Programme (ESAP). The ESAP, unlike the ERP, placed an emphasis on the social costs of adjustment. To facilitate an increased flow of private investment the government set a priority to eliminate trade restrictions in order to accelerate economic activities and widen the tax base. In addition, a tax holiday was accorded to new firms while levels of corporate profit taxes and taxes on dividends were lowered.

All five industrial sub-strategies exhibited a shift from consumer to intermediate and capital goods. During the period the SSRS and EAS created about 596,000 jobs, MGS about 296,000 jobs, MS about 243,000 jobs, and BIS about 193,000 jobs (Skarstein and Wangwe 1986). The Tanzanian economy marked a decline in the balance of payments deficit in the 1988/89 budget; between 1984 and 1989 the level of labour productivity was stable and value added in GDP increased. The adjustments succeeded in devaluing the currency from (p.167) TShs 16 (1986) to TShs 230 (1991) per US dollar. More land was put under cultivation and the country was able to experience an increase in the annual GDP growth rate and agricultural and industrial production in the period 1986–92. This package of reforms carried out in the early 1990s reduced and/or eliminated distortive barriers to production. In manufacturing, the level of capacity utilization which had declined to 5 per cent in the late 1980s increased to 34 per cent in 1994.

On balance, however, the long-term industrial strategy failed to improve the country’s export performance. By 1990, the level of recorded merchandise exports had increased but at a decreasing rate which was far below that of 1981. In addition, the nation still suffered from worse unemployment conditions and the public sector was still dominating the economy. There seemed to be a drop in the level of GDP per capita by about 6 per cent from that of the year 1976 (RPED 1994) with a poor performance from the textile industry being one of the reasons. Macroeconomic reforms, privatization, and trade liberalization led to deindustrialization (by 1990, twenty-two out of twenty-four textile factories had closed). In terms of technology development and growing industrial complexity there seems to have been a reversal characterized by industrial shallowing e.g. in textiles (producing grey material instead of printed products) and in engineering industries. Furthermore, the programme did not succeed in reducing the supply of money as was aimed at, largely because of unpaid loans to cooperative unions and marketing boards to finance crop purchases. As a result, the rate of inflation (which had declined from 32.4 per cent in 1986 to 28.9 per cent in 1989) had increased between 1990 and 1994. This hurt domestic purchasing power and led to higher nominal interest rates and affected the market for domestic manufactures.

8.5 The Return to Industrial Development as a Development Agenda, 1995–2011

In 1996, a twenty-five-year Sustainable Industrial Development Policy for Tanzania (SIDP2020) began to be implemented with the aim of enhancing sustainable development of the industrial sector. For the period 1996–2020 the government aimed at achieving sustainable industrial sector growth in order to create favourable levels of employment, economic transformation, equitable development, ISI, and export promotion. SIDP accorded priority to employment creation, economic transformation, and equitable development and sought to strike an appropriate balance between ISI and export orientation. The private sector was recognized as the main vehicle for making direct investment in the sector while the government would provide an enabling environment. The government may make direct investment in industries (p.168) (those which the private sector may not find it profitable to invest in) to encourage activities of critical importance for overall development.

The strategy had to be implemented in three phases. Phase I (1996–2000) was for a short-term programme to rehabilitate and consolidate existing industrial capacities. Phase II (2000–10) was for a medium-term programme to create new capacities in areas with potential for creating competitive advantage through use of efficient technology and learning processes. In this phase emphasis had to be placed on initiating the production of intermediate goods and light capital. Phase III (2010–20) is for a long-term programme to achieve major investment in basic capital goods industries to ensure consolidation of the industrial structures developed in the first two phases.

SIDP recognized the importance of the private sector in bringing such changes to the economy and suggested that what the government ought to do is create favourable conditions for the former to function efficiently. However, between 1996 and 1999, export earnings declined by 31 per cent while the overall trade deficit increased by 6.1 per cent (Bigsten and Danielsson 1999). In 1999 the economy adopted the development vision 2025 with emphasis on the role of the industrial sector for development and aiming at the nation to be semi-industrialized by 2025. Vision 2025 recognized the leading role of industry in transforming the economy.

Additional efforts to establish an environment for accelerating industrialization were put into the formation of the EAC in 2000 and into the adoption of common tariffs as well as elimination of intra-regional restrictions. An improving macroeconomic framework saw a reduction in the level of inflation to 5.2 per cent in June 2000 from 21 per cent in 1996, further creating an operating environment conducive to the nascent development policy. In the third quarter of 2000, commodity exports accounted for 50 per cent of total exports. The economy recorded increases in exports of fish, minerals, and other manufactured goods. Further, in 2004 UNIDO reported that by the third quarter of 2002, the total value of commodity exports increased by 16.2 per cent over and above the recorded level of 2001, with exports of non-traditional commodities contributing about 50 per cent of the increase by the end of 2002.

To augment efforts required to attain SIDP goals, the Export Processing Zones (EPZ) Act was established in April 2002 and its implementation effectively started in March 2003. The objectives of EPZ were to attract and promote investment for an export-led industrialization, to increase foreign exchange earnings, to create and increase employment opportunities, to attract and encourage transfer of new technology, and to promote the processing of local raw materials for export (value addition). Incentives offered by the act included a ten-year exemption from corporate taxes, remission from customs duty, VAT, and other taxes on raw materials and goods of a capital nature (p.169) which are related to production in EPZs, allowances to sell 20 per cent of goods in domestic markets, access to an export guarantee scheme, and unconditional transferability of profits, dividends, loyalties, etc. The vision of EPZ lies in the desire for the Tanzanian economy to export at least 80 per cent of goods/processes and to achieve at least US$100,000 annual rate of turnover.

In 2002 the economy experienced improved performance in the export sector through an increase in the value of export commodities. Merchandise exports decreased in the early 2000s compared to the 1970s. There has however been a marked growth in the share of exports from specific individual sectors, led by improvements in mining and manufactured goods. The manufacturing sector maintained improvements, which continued in an upward trajectory with an annual growth rate of approximately 5 per cent in 2001, a 0.1 per cent increase on the level estimated two years before. Exports of food, beverages, and tobacco increased between the 1970s and 1990s but then started to fall.

Increasing levels of individual sectors’ merchandise exports are partly due to the higher rates of capital growth over time. Capital is a crucial aspect for any economy to prosper as it facilitates effectiveness in production. Fifteen years of implementing SIDP have seen a boost in the economy’s capital accumulation which has in return facilitated improvements in the productivity of labour and output.

In 2009, export manufactured goods declined due to the drop in demand for those goods in neighbouring countries as a result of the 2008 economic crisis. Total value of the country’s traditional exports was reportedly 22.4 per cent greater in 2011 than during the previous year as a result of a significant increase in both the volume of exports as well as the price per unit of tobacco and cashew nuts.7

Currently, industries have been confronted by a series of interrelated external shocks, such as hikes in food prices, increases in energy prices, electricity cut-offs, and financial crises. These have implications for real output. Recent studies suggest that economic development requires structural change from low to high productivity activities. This underscores the need for upgrading and diversifying the industrial base (Lin 2011).

In June 2010 an Integrated Industrial Development Strategy (IIDS) 2025 was also adopted for the purpose of promoting efforts to achieve the SIDP goal of bringing the economy to a state of sustainable industrial development. The IIDS 2025 (June 2010) was formulated with a view to providing concrete strategies to implement SIDP 2020 and build a competitive industry by putting in place a competitive business environment and improving existing (p.170) development corridors—concentrated infrastructure development and promoting agriculture-led industrialization. Manufactured value added was projected to grow at 15 per cent p.a. The IIDS envisages a gateway port improvement for the region and the promotion of Economic Development Zones for growth and infrastructure development. It also articulates an industrial village concept whereby opportunities are created for the growth of micro- and small enterprises. The strategy targeted six sub-sectors: agro-processing, textiles, leather, fertilizer and chemicals, light machinery, and iron and steel.

8.6 Conclusion and Way Forward

When traced over time, industrial development in Tanzania can be seen to have gone through several different evolutionary phases. Between 1961 and 1967 an ISI industrialization policy with relative little state participation was favoured. This was later supplanted by principles of the 1967 Arusha declaration which advocated a more pronounced role in the economy for the state. The nationalization of means of production and distribution soon followed. Policies that were adopted aimed at achieving high levels of growth while ensuring social transformation, increased worker’s participation, and equitable distribution of national revenue. There was an increase in public ownership of industry and in state-led regulatory control on the flow of foreign investments, prices, and exchange rates. Less dependence was put on foreign aid and the government suggested utilizing local resources and producing intermediate goods for local industries. SIDO was created in 1973 for this purpose and two groups of industries were formed: one for production of consumables and other for intermediate goods.

In 1975, the BIS (and four others) was adopted to achieve growth by using the country’s own resources. Performance of the BIS was hampered by a combination of non-market measures, notably price controls, import licences, and the overvaluation of the exchange rate. The global economic crises of the 1970s and the Kagera war, as well as declining productivity and relative terms of trade led to an acute shortage of manufacturing inputs and goods. Following two unsuccessful episodes of the NESP and the SAP, the ERP came into effect in 1986 and sought to redress the balance. In 1986, price controls were abolished, overall state regulatory control further reduced, the rate of protection was decreased, and active engagement of the private sector sought. To promote export production, some schemes were further introduced one of which was the New Retention Scheme which replaced the GRS.

In the 1990s the government passed the National Investment Act 1997 to promote and protect private investment by providing tax holidays, subsidies, (p.171) and low taxes on corporate profits. This was later followed by the privatization of industries in the mid-1990s. In the same period the nation adopted the SIDP to last until 2020 for the purpose of achieving sustainable industrial development in order to increase employment, economic transformation, equitable development, ISI, and export promotion. However, implementation was derailed by a lack of effective allocation and utilization resources as well as a pronounced focus of the latter years’ poverty reduction strategies on social sectors characterized by longer maturity periods.

The output of the economy has been fluctuating and in fewer periods the targeted levels were attained. In recent times, the industrial sector—especially the service and construction sub-sectors—has been showing positive growth and accounts for an increasing share of total employment.

The manufacturing sector in Tanzania remains relatively small, with most activities concentrating on the creation of simple consumer products such as foods, beverages, tobacco, textiles, furniture, and wood allied products. In spite of its declining size, however, the sector continues to be of considerable importance to the Tanzanian economy and is still one of the most reliable sources of government revenue in terms of import sales as well as for both corporate and income taxes, accounting for over half of the annual government revenue collection.

The contribution from the manufacturing sector to overall GDP of the country has averaged 8 per cent over the last decade; however, activities within the sector have been registering an annual growth of over 4 per cent and the sector is currently the third most important to the Tanzanian economy behind agriculture and tourism.

What is the way forward? Expanding the manufacturing sectors of African economies, Tanzania in particular, as a means of stimulating their growth and diversification has long been a preoccupation of many of the region’s governments. In spite of this concern, most African countries have not been able to achieve the required threshold levels of manufacturing sector size, structure, and dynamism to help them escape from the vicious cycle that has restricted their significant and sustained entry in to foreign markets (Lyakurwa 2008).

Inherently isolated markets of African products create obstacles for manufacturing industries because of insulation from external market disciplines through trade and competition, thereby being denied the promotion of economies of scale in manufacturing on the continent.

Manufacturing has strategic importance in technology and innovation for economic development since it explores new ideas and is a leading sector for technological diffusion, which has strong linkages and spillover effects associated with manufacturing. However, high production costs continue to frustrate industries across Africa. In Tanzania, much like the rest of sub-Saharan Africa, infrastructure bottlenecks such as disjointed road networks and power (p.172) shortages continue to define the manufacturing landscape. This in turn lowers the productive capabilities of nations with multiple reverberations, for example through increases in unemployment, shortage of goods and services, rise in price levels, and general increase in continental uncompetitiveness.

In positioning the region in the context of open regionalism, globalization, and competitiveness, the acquisition of comparative advantage remains important in strategizing how to take advantage of the continent’s resource endowments. However, Tanzania and Africa are awash with impressively written strategies, with effective implementation remaining by far the weakest link. There is a need to take monitoring and evaluation (M&E seriously: a progress marker might be: How to tell whether progress in the desired direction is being made or not. Priority needs to be placed on mechanisms for monitoring progress and learning over time from feedback. There is a need to plan carefully round what it takes to make it work e.g. human resources, financial resources, infrastructure, and other forms of commitment. Finally, investing in technology and innovation is key, considering that knowledge is the basis of sustainable competitiveness. Incentives are to promote knowledge creation and accumulation and to facilitate access to knowledge and human resource skills.

References

Bibliography references:

Bagachwa, M. S. D., Mbelle, A. V. Y., and Arkadie, B. V. (1992). Market Reforms and Parastatal Restructuring in Tanzania. Dar es Salaam: University of Dar es Salaam.

Bank of Tanzania (BoT) (1982). Twenty Years of Independence (1961–1981), a Review of Political and Economic Performance. Dar es Salaam: Bank of Tanzania.

Bigsten, A. and Danielsson, A. (1999). Is Tanzania an Emerging Economy? Göteborg: A Report for the OECD Project ‘Emerging Africa’.

Bigsten, A., Mutalemwa, D., Tsikata, Y., and Wangwe, S. (1999). Aid and Reform in Tanzania. Washington, DC: World Bank, available at: <http://documents.worldbank.org/curated/en/1999/08/6705641/aid-reform-tanzania>, accessed 10 February 2016.

Bureau of Statistics (1978). Hali ya Uchumi wa Taifa katika Mwaka 1977–78. Dar es Salaam: Ministry of Finance and Economic Affairs. Government Printer, United Republic of Tanzania.

Edwards, S. (2012). ‘Is Tanzania a Success Story? A Long Term Analysis’. National Bureau of Economic Research Working Paper Series, No. 17764.

Lin, J. Y. (2011). ‘New Structural Economics: A Framework for Rethinking Development’. World Bank Policy Research Working Paper Series, available at: <http://ssrn.com/abstract=1547636>, accessed 30 August 2012.

Lipumba, N. H. and Kasekende, L. (1991). ‘The Record and Prospects of the Preferential Trade Area for Eastern and Southern American States’, in A. Chibber, and S. Fisher (eds) Economic Reform in Sub-Saharan Africa. Washington, DC: World Bank.

(p.173) Lyakurwa, T. A. (2008). African Imperatives in the New World Trade. Nairobi: Africa Economic Research Consortium.

Maliyamkono, T. L. and Bagachwa, M. S. D. (1990). The Second Economy in Tanzania. London: James Currey.

Mongi, J. F. (1980). ‘The Development of Price Controls in Tanzania’, in S. Rwegasira (ed.) Inflation in Tanzania. Dar es Salaam: Institute of Finance Management.

Ndulu, B. (1987). Stabilization and Adjustment Policies and Programmes, Country Study 17. Helsinki: UNU-WIDER.

Research Programme on Enterprise Development (RPED) (1994). Development and Growth of Industrial Enterprises in Tanzania. Helsinki: Centre for International Business Studies.

Rweyemamu, J. (1973). Underdevelopment and Industrialisation in Tanzania: A Study of Perverse Capitalist Industrial Development. Oxford: Oxford University Press.

Skarstein, R. and Wangwe, S. M. (1986). Industrial Development in Tanzania: Some Critical Issues. Dar es Salaam: Tanzania Publishing House.

Szirmai, A. and Lapperre, P. (2001). The Industrial Experience in Tanzania. New York: Palgrave.

Timmer, M. P. and Szirmai, A. (2000). ‘Productivity Growth in Asian Manufacturing: The Structural Bonus Hypothesis Examined’. Structural Change and Economic Dynamics 11(4): 371–92.

UN Industrial Development Organization (UNIDO) (2004). Tanzania Review of Industrial and Trade Performance; Macro-economy Commodities; Industrial Subsectors; Export Processing Zones. Vienna: UNIDO.

World Bank (1991). Tanzania Economic Report: Towards Sustainable Development in the 1990s, Report no. 9352-TA. Washington, DC: World Bank.

Notes:

(1) In 1973, labour productivity was 44 per cent higher than in 1967.

(2) For implementation purposes, this twenty-year strategy was subdivided into several sub-strategies namely BIS, MGS, EAS, SSRS, and MS. The Basic Industrial Strategy (BIS) was for bringing about structural change and reducing the degree of the manufacturing sector’s dependence on foreign aid. Production was centred on consumer, intermediate, and capital goods for the domestic market. Maximum Growth Strategy (MGS) was for maximizing industrial growth through incorporating in production those industries which could give highest value added out of investment. Small-scale Rural Strategy (SSRS) was for increasing the spread of small-scale units in most parts of rural areas. With this strategy large-scale industries would be established and put into operation only for those activities which would not be feasible when produced in small operations. The East African Strategy (EAS) proposed that the government should choose to specialize in production of some commodities to supply to the East African market while leaving alternative commodities’ production in the hands of other member states. The Mixed Strategy (MS) went wider than others by opting to reach out for a larger part of national goals than focusing solely on specific ones such as growth.

(3) Inflation decreased to 6.9 per cent in 1976, and current account deficit declined to 9.5 per cent of GDP in 1975 and 1.3 per cent in 1976.

(4) From 5.8 per cent of US manufacturing labour in 1984 to 3.9 per cent in 1990. At the same time developing Asian economies recorded comparative labour productivity levels in medium- and large-scale manufacturing of between 5.7 and 10 per cent of the US level in 1987.

(5) These included increasing producer prices, improving agricultural marketing and distribution, and restructuring cooperative unions.

(6) By 1984 the overvalued exchange rate and excessive price controls had resulted in extremely high effective rates of protection. The effective rate of protection for the entire manufacturing sector was no less than 470 per cent in 1984 while overall industrial protection had risen to 526 per cent in the same year from 134 per cent in 1966.

(7) (BoT Economic Review, Jan. 2011).