Industrial Development in Tanzania: renewed commitment amidst persistent challenges

by Dennis Rweyemamu pic+industrial

The fifth phase Government of the United Republic of Tanzania has demonstrated renewed commitment to industrialization, as part of a broader agenda to create employment opportunities and substantially reduce poverty. This renewed commitment to promoting industrial development is timely. Literature suggests that economic development requires structural change from low to high-productivity activities, and that the industrial sector is a key engine of growth in the development process. Virtually all country cases of high, rapid and sustained economic growth have been associated with industrialization, particularly growth in manufacturing production.

Unfortunatley, the manufacturing sector in Tanzania is an example of disappointing sectoral performance. In the past, policy failures both in design and implementation have contributed to poor industrial performance. During the import-substitution phase of the 1970s, government policies and efforts focused more on providing support to domestic firms than on getting them to perform. Furthermore, the emphasis was on setting up industries rather than on building dynamic capabilities that would allow firms to be competitive. High protection meant that domestic firms were poorly prepared for international competition. The fact that the state created and operated the manufacturing firms simply made the problem worse. Investments were often made with little regard to efficiency, and the managerial capacity of the state was badly overstretched.

The structural adjustment phase of the 1980s and 1990s, saw the withdrawal of government support, even in the presence of market failures, and the liberalization of trade without taking account of the capabilities of domestic firms is another example of policy failure. Emerging from being the worst affected during the economic crises of the early 1980s, (despite massive public investments), the sector has never really recovered. The main reforms in the sector evolved around restructuring activities and liberalizing the investment climate. While there were mild achievements in a few industries, the rest were either stagnant or worse off. With the ushering of the Poverty Reduction Strategy Papers (PRSPs) in the early 2000s, resources were shifted away from the productive sectors that are necessary for sustained growth and poverty reduction, with a new focus on the social sectors.

Although policy failures did contribute to poor industrial performance, structural factors also played a role. The structural factors are manifest in the form of poor infrastructure (including roads, airways, railways, and communication), low human capital, small size of domestic markets, and a low entrepreneurial base. No industry can run smoothly in an environment where the whole range of basic infrastructure leaves a lot to be desired. Fortunately, we are now seeing efforts by the Government to address infrastructural constraints, but these efforts need to be intensified.

The small size of domestic markets in Tanzania implies that we are unlikely to sustain an industrialization agenda without access to regional and global markets. These external markets would provide an opportunity to expand production as well as exports, and reap the benefits of scale economies. It would also make available the much needed foreign exchange to import intermediate inputs and capital goods for domestic industries.

But are we competitive enough to enter into these markets? It is important that industrial development efforts be part of an overall process of integration into the global economy rather than inward-looking as was the case during the import-substitution phase. Imposing import bans on goods will only help firms targeting the domestic market, and in a way be a “cost” to consumers who would have otherwise accessed cheaper imports of the same or even higher quality. There should be efforts towards building the capabilities of domestic firms and preparing them to compete in export markets for medium and high-technology manufactured goods.

While the Goverment has recognized the necessity to promote industrial and manufacturing development in order to address the country’s development challenges, there is need to search for an approach that is strategic, integrates lessons from the past, and takes into account the realities of a changing global environment. Investment in human capital should be key to any such strategy so as to improve efficiency and thus productivity levels. This, however, must be supported by necessary public goods (particularly investments in infrastructure), support institutions (for trade facilitation, credit, access to technology, establishment of standards and certification) and an incentive structure that is conducive to industrial growth.

So, in the fierce competition of export markets, does Tanzania stand a chance? Yes, it does. Not that it will be easy or quick, but with better policies and more investment, we could be competitive in things like agro-products, footwear, furniture and other low-skill industries. Opportunities are there, but we need to strategize and implement plans. Otherwise we may remain stuck in only exporting natural resources.

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