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“MANUFACTURING AND TRANSFORMATION IN A DEVELOPING COUNTRY CONTEXT: ASSESSING POLICY RESPONSE UNDER CHANGING DEVELOPMENT PARADIGMS - TANZANIA”
By Prof. A.V.Y. Mbelle
Abstract
Transformation is desired for many reasons such as creation of employment opportunities in higher productivity sectors; greater private sector role, addressing gender imbalances, etc.
At the heightened desire for transformation lies Manufacturing, with developed country experiences showing that Manufacturing remains a key driving force of overall economic growth. This is largely attributable to its higher productivity and scope for innovation; with the assertion that competitiveness of manufacturing is one of the basic determinants of long-run sustainable growth. For Manufacturing to play this role effectively, an enabling policy framework must be in place.
The urge for economic transformation in Tanzania dates back to independence days with the desire to correct the three colonial legacy ills of poverty, ignorance and disease. Tanzania Development Vision 2015 re-emphasized this urge. Further articulation has been made in subsequent development policy frameworks for achieving TDV 2025 aspirations.
The route to transformation through Manufacturing in Tanzania has been influenced by a number of developments such as changing global development paradigms that have often called for domestic policy change.
Has national policy been positioning Tanzania’s Manufacturing to play this transformational role?
This paper uses time series data for the period 1961 to 2015 to examine the influence of policy change on performance of Tanzania’s Manufacturing sector and the sector’s potential in delivering socio-economic transformation. The analysis focussed on three sets of policies: macro-economic policy, sector specific policy and non sector specific microeconomic policy.
The main finding of the paper is that policies, though generally supportive of manufacturing had not been properly sequenced. In light of this finding and Tanzania’ urge for faster socio-economic transformation, the paper suggests proper sequencing in order to exploit policy synergies.
Key words: transformation, manufacturing role, government policy
CONTENTS Page
Abstractii
Table of contentsiii
Abbreviations and acronymsv
Chapter 1: Introduction and background1
Chapter 2: Record of Policy and Manufacturing Performance in Tanzania, 1961-20154
Chapter 3: Literature review on interconnectedness of manufacturing performance, transformation and policy 13
Chapter 4: Methodology for assessing impact of policy on manufacturing performance22
Chapter 5: Empirical results and discussion24
Chapter 6: Concluding remarks26
List of Tables
2.1: Importance of Manufacturing sector in Tanzania: 1964 to 2015 7
2.2: Manufacturing Employment 2006 and 2014 Compared7
2.3: Employment by sector and gender, 2016 and 20149
2.4 Performance of Manufactured Exports in Tanzania, 1980-2014 Selected Years 10
2.5: Tanzania – Manufacturing Value Added and Export Performance 2008 and 201310
2.6: Tanzania – Manufacturing Value Added and Export Performance Compared with Selected LDCs, 2013 11
Competitive Industrial Performance Index 2013: World Raking Ranks – Tanzania and Selected Countries 12
2.8: Factors affecting LDCs Competitiveness in global value chains12
2.9: COSTECH Registered Research and Development Institutions in Tanzania, 2015 13
3.1 Technology-Related Policy Dimensions16
4.1: Relative Impact of Trade and Macroeconomic policy in Tanzania: 1970-199021
5.1: Empirical Results: Determinants of Manufacturing output in Tanzania, 1961-201524
Table 5.2: Empirical Results Determinants of Manufacturing Value Added in Tanzania, 1961-2015 24
5.3: Empirical Results – Determinants of Manufacturing Exports in Tanzania1961-2015 25
List of Figures
2.1: Long run trend of Manufacturing Performance in Tanzania: 1961-20156
2.2: Snapshot of Manufacturing sector’s relative importance, 20156
2.3: Long term trends in Manufacturing Value Added and Manufacturing Employment: 1967-2015 8
2.4: Market growth and Tanzania’s presence in EAC & SADC markets for manufactured products 2000-2010 11
3.1: Conceptual Linkages between industrial development and support organizations14
ANNEXES31
1: Industrialization-related SDGs31
2: Elements of Inclusive and Sustainable Industrial Development (ISID)32
3: Phases in industrial revolution32
4: International Standard Industrial Classification – Codes33
5: International Standard Industrial Classification – Sectors33
6: Technological classification of exports, Standard International Trade Classification33
7: Competitive Industrial Performance (CIP) index34
8: Data characteristics: Normality Test35
9: Data Characteristics: Unit Root Test36
10: Trends of Exchange Rate and Manufacturing Exports in Tanzania, 1961-201537
11: FDI inflows in Tanzania, %change, 1961-201437
12: High-tech manufactures exports: Codes and description38
ABBREVIATIONS AND ACRONYMS
AUAfrican Union
ESRFEconomic and Social Research Foundation
FYDPFive Year Development Plan
GCIGovernment of Cote d’Ivoire
ICTInformation Communication Technology
MDGsMillennium Development Goals
R&DResearch and Development
SDGsSustainable Development Goals
STEMScience, Technology, Engineering, Mathematics
STIScience, Technology and Innovation
UNUnited Nations
UNDPUnited Nations Development Programme
URTUnited Republic of Tanzania
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“MANUFACTURING AND TRANSFORMATION IN A DEVELOPING COUNTRY CONTEXT: ASSESSING POLICY RESPONSE UNDER CHANGING DEVELOPMENT PARADIGMS - TANZANIA”
- Introduction and background
1.1Introduction
Industrialization is acknowledged world wide as the engine of growth. In the African continent, the imperative to industrialize in today’s global context has been spelt out in various documents such as UNIDO and UNCTAD (2011), ECA and AU (2013) and identifies commodity-based industrialization as an engine of growth and economic transformation. As a follow-up to this and other on-going processes in the African continent, over 300 development stakeholders met in Abidjan during 18-20 March 2015 to discuss Africa’s emergence and share experiences of other countries outside the Continent (GCI/UNDP, 2015). It was noted thatAfrica has increasingly evidenced its potential for economic emergence, with robust growth in most economies and social and political stability. Africa has enjoyed robust economic growth – outweighing the effects of low growth witnessed in the 1980s through the 1990s.
Despite this development there are issues that needed further consideration. These include minimal impact of growth on poverty reduction,structural transformation and diversification of the sources of growth; and improving quality of jobs and productivity. It was further noted that the state has a developmental role to play,to craft a vision, strategy and plans for the country.
Of particular interest were two observations. First, that Africa’s structural transformation path is unique from (predicted) normal pattern. The transformation has generally escaped industrial development and that Africa’s trade, though increasing, has shown limited diversification, generally remaining concentrated on export of primary commodities. Second, Africa has demonstrated growing signs of competitiveness for its productive sectors, enabling visibility on global trade. The signs, however, are not yet strong.
The development stakeholders saw the way forward for Africa to be Industrialization, Research and Development,and continuous investment in human resources. Manufacturing is targeted as the driving force for industrialization.
Role of Manufacturing (see also Annexes 4 and 5)
From the first industrial revolution with UK serving as “workshop of the world”, Manufacturing (International Standard Industrial Classification (ISIC 3; see Annexes 4 and 5) has been an important driving force to economic development (Broadberry and Leunig (2013). Since then, the role of manufacturing in economicdevelopment continues as important as ever with new focus of growth tilting towards industry and jobs.Manufacturing is the mostknowledge-intensive sector of the economyand still the most importantrecipient of technological progress.
Developed country experiences show that Manufacturing remains a key driving force of overall economic growth. This is largely attributable to its higher productivity and scope for innovation; with the assertion that competitiveness of manufacturing is one of the basic determinants of long-run sustainable growth (Leistritz, 1996;UNCTAD,2012; UNIDO, 2015).
Moving towards inclusive and sustainable industrial development(ISID) requires pursuing rapid, long-run and stable growth and technological change within manufacturing. This has been emphasized by the The Lima Declarationadopted by UNIDO’s Member States in December 2013, (UNIDO 2014, see Annex 2). ISID has three elements: long-term (or sustained) industrialization as a driver for development; socially inclusive development offering equal opportunities and an equitable distribution of benefits - equity- adjusted wage, employment intensity; and environmental sustainabilitywhich focuses on decoupling the prosperity generated by industrial activities from excessive natural resource use and negative environmental impacts(UNIDO 2015).
As (UN 2015)points out, technology, science and capacitybuilding are major pillars for implementingthe 2030 development agenda.Technology can deliver win-win-winsolutions, simultaneously balancing growth,environmental and social concerns.SDG target 9.2 sets the objective for industry, that “by 2030, significantly raise industry’s share of employmentand Gross Domestic Product (GDP), in line with national circumstances, and doubleits share in least developed countries”.Technology and innovation now have a central role in the Sustainable Development Goals “technology, science and capacity building are major pillars for implementing the post-2015 agenda and the Rio+20 follow-up processes” (UNDESA and UNDP, 2012). See also Annex 1.
Though technology is lauded for its advantages, caution is also drawn on its challenges. In view of the unfolding technological developments (fourth industrial revolution when both industrial machines and entire factories become automated) workers will be challenged to be more educated, more flexible and more technologically savvy (UNDP ibid). See Appendix 3. Schwab (2016) is more sounding and sees the fourth industrial revolution,which will be characterized by velocity, scope, and systems impactevolving at an exponential rather than a linear paceto“fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before”. The author underlines the importance of utilizing the opportunity to shape the Fourth Industrial Revolution and direct it toward a future that reflects common objectives and values.
Manufacturing plays other important roles as well such as sustaining growth by lengthening its episodes and reducing its volatility. Manufacturing promotes inclusive growth through generating direct and indirect jobs in manufacturing and manufacturing-related services thus bringing more people into the growth process (Dinh and Monga, 2013; UNIDO 2013). In fact if productivity growth goes hand in hand with accelerated growth of output, the net effects on employment can be positive.
Manufacturing is also associated with lowerlevels of poverty, better income distribution, andbetter Human Development Index rankings. It is a high-productivity sector capable of absorbing large numbers of moderately skilled workers (UNIDO 2011). Perhaps the single most important contribution the SDGs make to Africa is that they explicitly recognize that sustainable development means creating good jobs—jobs that pay living wages, offer dignity of work, and create a chance to develop new skills (Goal 8) (GCI and UNDP, 2015).
Countries at low and lower middleincomes have opportunities to create a largenumber of formal manufacturing jobs (UNIDO op.cit). This, however, depends to a large extent on the state of domesticcapabilities and technologies.Developing domestic technologicalcapabilities stands as one of the mostimportant elements to sustain growth.
For Manufacturing to play a transformative role three factors need to be in place: ability to sustain growth (growth per capita(Szirmai 2013); ability to sustain growth over longer uninterrupted periods, lower volatility of growth); competitiveness (Lall, 2001) and enabling policy (UNIDO 2015).Countries with steady economic growth, driven by industrialization; international trade and related services managed to reduce poverty most effectively (UNECA and AU, 2013).
1.2Background
The urge for economic transformation in Tanzania dates back to independence days with the desire to correct the three colonial legacy ills of poverty, ignorance and disease. Tanzania Development Vision 2025 resoundedthis urge by articulating the desired state to be achieved by 2025 (URT 1999a and b). Further articulation has been made in subsequent development policy frameworks, notable being Tanzania’s Long Term Perspective Plan, LTPP, (URT 2011).
The route to transformation through Manufacturing in Tanzania has been influenced by a number of external/global and internal developments.
Globally, the paradigm of growth that characterized the 1960 and 1970s (up to mid 1980s) called for massive investments to spur growth. This period was followed by growth and human development/poverty paradigmmuch inspired by publication of UNDP 1990 Human Development Report. The last phase is one of sustainability and beyond paradigm inspired by the Rio Conference of 1992. For Tanzania, with respect to Manufacturing-related policies, three phases can be discerned (ODI 2016): early years of independence (1961-1966); socialist era (1967-1985) Structural adjustment and liberalization phase (1986-1995)and return to the development agenda and industrialization (1996-2015). The last two can be adjusted to 1986-1998 and 1999-2015 to reflect crafting of Tanzania Development Vision 2025 in 1999.
When the two perspectives are mirrored, Tanzania’s perspective can be categorized as growth-related policies (up to mid 1990s), sustainability-related policies from 1996 with adoption of Sustainable Industrial Development Programme, SIDP) and poverty reduction agenda after 2000 following crafting of Poverty Reduction Strategy Paper (URT 2000) and the first National Strategy for Growth and Reduction of Poverty (NSGRP/MKUKUTA) in 2005 (URT 2005). It is thus expected that policy response will reflect the development paradigm of the day.
Policy options for influencing Manufacturing
Broadberry and Leunig (2013) point out three possible policy instruments for influencing Manufacturing: macro economic policy, sector-specific policiesand manufacturing-relevant non-sector-specific microeconomic policies. These are discussed in detail in section three.
1.3Emerging issues
For developing countries like Tanzania development objects are many and sometimes conflicting each other. The quest for transformation through industrialization requires balancing the various policy options in order to achieve a win-win-win situation.Choice of the pattern of industrialization will influence poverty reduction, environmental sustainability and food security. Has such a rebalancing process been experienced in Tanzania?
1.4Objective of paper
This paper examines the influence of policy on Manufacturing in a developing country context geared to achieving economic transformation through industrialization, with Tanzania as case study. Additionally assessment of coherence of chosen policies with changing development paradigms is made.
1.5Organization of paper
Five more sections complete this paper. The next section presents record of performance of Tanzania’s Manufacturing sector, followed by section three which provides brief review oftheoretical and empirical literature. Methodology is the subject of section four. Empirical findings and their discussion are presented in section five. The last section, six, provides concluding remarks.
- Record of Policy and Tanzania’s Manufacturing Performance
Overview
This section presents brief account of policies that had a bearing on Manufacturing and the sector’s performance for the period 1961 to 2015. The section has two sub-sections, on policy and sector performance.
2.1Record of policy
Probably one of the areas in Tanzania that has witnessed extensive research work is the area of policy. We will not attempt to add to the list mainly for avoiding redundancy. However, for purposes our paper we will only highlight some relevant aspects drawing on the treatment suggested by Broadberry and Leunig (2013). Related Tables, Figures and Annexes in this paper accomplish the task.
Macroeconomic policy
Macro economic policy involves a range of instruments related to monetary policy, fiscal policy, Government purchasing regional, policy; competition policy; demand management; international trade, and exchange rate regimes.
For purposes of our paper we pick exchange rate regime. The watershed to exchange rate policy regime was provided by economic reforms adopted in 1986moving towards stability thereafter. As shown in Annexes 8 and 10, policy has had varied impacts on the exchange rate.
Sector-specific policies
Sector-specific policies include encouragement of mergers to create national champions; nationalization, privatization; investments; selective taxes; public sector purchasing; and the encouragement of foreign direct investment (FDI).Detailed treatment of policy is accomplished in many works such as Rweyemamu (1976), Sharstein and Wangwe (1986), Page (2015), Page and Tarp (2016).
For purposes of our paper we peak Foreign Direct Investment. From initial wide swings, changes in inflows stabilized after mid 1990s. We attribute this to establishment of Tanzania Investment center in 1997, which created a favourable climate for investments e.g. one stop center concept. Annexes 8 and 11 show the impact. FDIs are preferred for many reasons such as technology transfer, improving competitiveness, etc.
Non-sector-specific microeconomic policies
Manufacturing-relevant non-sector-specific microeconomic policies include policies on education and training; science and technology policy; regional policy and agglomeration economies;competition policy, etc.
We pick education and training to represent this group. The Education and Training Policy of 1995 liberalized education training in the country. This led to expansion of both infrastructure and enrolment. It is expected that the critical personnel for manning manufacturing tasks would thus be expanded.
2.2Record of Manufacturing performance
Manufacturing growth and contribution to GDP, a long term trend
Overall, the pattern of Manufacturing performance in Tanzania shows volatility over time. Starting at high growth rate and contribution to Gross Domestic Product (GDP) in the 1960s to 1970s, the sector declined both in terms of growth in the 1980s and importance ever since (Skarstein and Wangwe, 1986;Szirmai and Lappere, 2001; see Figure 2.1 which shows performance of Manufacturing sector in terms of both growth and contribution to GDP. Such “volatility” is typical of a situation where policies are not implemented in a sustainable way or are inconsistent (UNIDO 2015).
Figure 2.1 Long run trend of Manufacturing Performance in Tanzania: 1961-2015
The trend in Manufacturing performance shows typical premature deindustrialization – longterm decline in manufacturing after 1976, relative to other sectors(at a lower level of GDP per capita), with manufacturing not yet reaching the shares of employment and GDP typically associated with the normal turning point of industrialization).See UNIDO 2013.
Relative importance in economic structure – transformation is eluding industry
Figure 2.2 shows relative importance of Manufacturing in Tanzania during 2015, ranking fourth after services, agriculture, and construction.