Name: Elaine BakerStudent number: 115927Course: MSc Political Economy of DevelopmentSupervisor: Dr Machiko NissankeDissertation: Choosing winners to create: a framework for industrial policy

in TanzaniaDue date: 17th September 2001Word count: 11,590

Choosing winners to create: a Framework for Industrial Policy

in Tanzania

Abstract

This paper argues the case for an active state policy to promote the manufacturing sector.

Ann assessment is made of developments in the Tanzanian manufacturing sector, and

how structural adjustment programmes have affected manufacturing. The main thesis of

the paper is that successful active industrial policy requires three conditions – a

developed and dynamic information base and research capacity available to the state; a

clear framework of criteria through which targeted industries are chosen; and state

support being credibly tied to productivity improvements and performance. The focus of

the paper is on the second condition – establishing an analysis framework through which

potential priority industries for state support can be identified.

This framework consists of analysing both the requirements for success, and the effects

on the wider economic environment of industries in thirteen areas. These areas are

factors of production, linkages and vertical integration, foreign, regional and home

market conditions, technology, skills, type of employment, location, infrastructure,

environment and natural resources, business institutions and competition structure, and

ownership and investment. Different industries have different requirements in each of

these areas, and can affect the economic environment in each of these areas differently.

For each area, a theoretical background is presented, the conditions in Tanzania

described, and an approach put forward for how different industries can be analysed with

respect to the area, with a view to choosing priority industries and state support

mechanisms.

1

The paper concludes by arguing that the capacity to perform analysis and implement

policy under such a framework requires greater financial resources and human resource

capacity for the state, than presently the case in Tanzania.

Developing Manufacturing

The importance of the development of the manufacturing sector

The development of manufacturing1 is central to generating higher living standards.

Historical experience has shown that growth in countries' incomes entails greater than

proportional growth in manufacturing, and occurs through the transformation of the

structural composition of an economy in terms of the primary, secondary and tertiary

sectors (Singer, 1952). There is a strong correlation between productivity growth in an

economy in general and growth in the size of the manufacturing sector (Kaldor, 1967).

In the context of international trade, specialisation in manufacturing industries has

significant advantages over specialisation in agriculture, primary commodities or

internationally mobile services. This is because manufacturing has high potential for

economies of scale, for growth based on cumulative learning and experience, and for

being the driver for growth in primary and services sectors through supplying inputs and

demanding their output (Weiss, 1988). Jamal and Weeks (1993) argue that larger scale

formal sector manufacturing can lead to growth in the informal sector, both smaller scale

informal manufacturing and informal sector services, by creating demand for informal

sector inputs and wage goods. The informal sector is an important breeding and testing

1 The manufacturing sector is the part of an economy involved in the transformation and combination of primary goods into processed products with higher value. Industry is a wider term than manufacturing, and is defined by Riddell (1990, p.4) as manufacturing plus construction, extractive activities (e.g. mining) and utilities (electricity grid, water). Manufacturing is unique among these as being less linked with a geographic place of natural resource location or of demand. This paper focuses on the manufacturing sector and uses the word industry synominly with it.

2

ground for entrepreneurs and business ideas, but the formal manufacturing sector has

high capacity for use of technology and economies of scale.

International competitiveness is the most important long-term goal for manufacturing.

Competitiveness comprises production costs, product quality and reliability of supply

(Kweke et al, 1997, p.13). Industries which are not internationally competitive in the

long run will either impose opportunity costs on domestic consumers and users of its

products if protected, or be unable to survive if not protected from international

competitors.

Active industrial policy

Historical experience has shown that industrial development requires an active state

industrial policy. Gerschenkron (1962) and Weiss and Hobson (1995) argue the case for

state intervention to promote industrialisation in the context of competition from more

industrialised countries (called late industrialization). A wealth of evidence from East

Asia shows that industrialisation took place through a "governed market" (see Wade,

1990; Amsden, 1997). This does not only entail providing an "environment" of general

infrastructure, general education and a stable monetary system. It also involves

prioritising and promoting key sectors by directing credit, subsidies or tax concessions,

promoting or subsidising exports, strategic competition and coordination policy, trade

protection of the domestic market for infant industries, the provision and dissemination of

information and a key role for the state in the development of industry, business and

financial institutions. It involves sector specific policies as well as macro policy (Kweke

et al 1997, p.40; Bagachwa, 1992).

3

Reasons for state involvement

An active state industrial policy is required because the early stages of industrialization

involve a critical mass of coordinated conditions and activities (Singer, 1952). A group

of industries may only be viable when in close proximity of each other (Rosenstein-

Roden, 1964), giving rise to a process of circular causation - for example a steel industry

needing a railway system to transport its inputs and outputs, and a railway system

needing a steel industry for its construction (Skitovsky, 1954). A group of industries may

require certain types of infrastructure and services, but those infrastructure and services

may not be viable without the presence of industrial activity. This is related to Krugman

and Venables's (1995) theory of agglomeration, which shows how the forces which make

it advantageous for industries to locate near one another (external economies of scale)

can be strong enough to outweigh higher input and wage costs due to higher local

demand in more industrialised regions, and so exclude some countries and regions from

industrialization.

In addition to external economies of scale effects, there are dynamic returns to scale

effects (Ocampo, 1993). This means that industries may only be competitive after a

prolonged period of accumulated experience, learning-by-doing (Arrow, 1962) and

institutional evolution within firms and industries.

Proponents of reliance on private markets argue that these difficulties can be overcome

by capital markets. In the case of external economies of scale, if a private investor

realizes the presence of a group of potential successful activities (industries, services and

infrastructure) with mutual dependence, it will invest in the whole group at once.

However, in developing countries the critical mass of industry, infrastructure and services

may be so large that individual investors or funds cannot do this. If groups of investors

combine, this gives rise to herd behaviour (Obstfeld, 1996) and so-called "second

generation" financial crises, whereby if one investor liquidates an investment, others do

so also.

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In the case of dynamic returns to scale, they argue that in is in the interests of private

investors to invest in industries while they are learning, in order to profit when they have

accumulated experience. However, the long time periods involved in such investments

make them high risk and dependent on the country environment, and so those developing

countries which can attract international finance can only attract short term finance. In

addition, learning spillovers may mean that others may benefit from their investment

more than the investor does, so full private incentives are not present but must be created

by the state (Aoki, Kim and Okuno-Fujiwara, 1997).

Markets, including capital markets, do not simply exist but must develop, so the capacity

and incentives for investors to coordinate with each other, and the financial practices and

contracts needed to facilitate investment, may not be present. Market failures are

pervasive in developing countries (Amsden, 1997). Those who have the knowledge and

the interest in developing a particular industry in a particular place often lack the

resources to invest, or the collateral to make the risk to a lender acceptable.

Proponents of reliance on private markets also argue that these difficulties can be

overcome through integration into world markets. If an industry is dependent on another,

it can simply import from or export to and from equivalent industries in other countries.

This can be true for some kinds of manufacturing, and international trade has an

important role in development. However, it is not true for other activities, as it assumes

perfect costless mobility of all relevant goods and services can be created by

liberalization. In reality, even in a fully trade liberalized country, transport costs and

information, networking, cultural and language barriers often make trade more costly

than local procurement, ceteris paribus. Many services and infrastructure are not

internationally mobile. Therefore the need for a critical mass of industries, services and

infrastructure which is domestically based remains. Models which account for trade

costs, such as Krugman and Venables' (1995) are more relevant than those trade theories

which assume a perfect mobility, perfect immobility dichotomy, such as Hechscher-Ohlin

theory (described in Markusen et al, 1995).

5

Manufacturing in Tanzania

Data about manufacturing

An assessment of the development of the manufacturing sector in Tanzania is severely

hampered by a lack of availability and quality of data. Data on manufacturing is

collected by a variety of government departments and agencies in Tanzania (such as the

Bureau of Statistics, government departments, customs authorities), which report to

international organisations (such as the United Nations Industrial Development

Organisation - UNIDO, UN Conference on Trade and Development – UNCTAD, the

World Bank and the UN Economic Commission for Africa - ECA).

Surveys of manufacturing firms are not comprehensive and the vast majority of estimates

include only the formal large-scale sector. Tax evasion and the costs of monitoring and

reporting mean that firms responses are not always accurate (Srinivasan, 1994). The types

of activities included in the manufacturing sector (rather than in the broader industrial

sector including construction, mining, utilities etc, or in the primary sector) are often

ambiguous, and are highly significant. For example, Tanzania's 1981-1896 wider

industry growth rate was 12.1% while its manufacturing growth rate was 3.3% (Bennell,

1998, p.627). These factors, together with the measurement problems of different

indicators, mean that data from different sources often does not agree (Riddell, p.10).

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Manufacturing value added

Manufacturing value added (MVA) is the net output of the manufacturing sector after

adding up all outputs and subtracting intermediate inputs. It is calculated without making

deductions for depreciation of fabricated assets or depletion and degradation of natural

resources (World Bank, 1999). Valuing inputs and outputs over time involves deflating

prices, which in turn relies on regular and accurate surveys to establish producer price

indices.

Different sources of MVA contradict each other. The Tanzania 1983 MVA figure

published by UNIDO was $360m, while the Economic Commission for Africa figure was

$308m. For 1985 the same organisations have figures of $219m and $393m respectively

(Riddell, 1990, p.28).

MVA data for the years 1965-1991 is available from UNIDO. However, figures are

available only in current Tanzanian Schillings, which are not helpful as Tanzania has

experienced very high and variable inflation, and in current US$, which are subject to

exchange rate problems, and also less so to inflation.

In terms of annual growth rates for manufacturing value added, data in Riddell (1990,

pp.18-19) indicates the following:

1963-73 10.2%

1973-79 4.3%

1979-86 - 4.5%

Average annual growth rates from the Tanzania planning commission continue from this:

1987-90 4.13%

1991-95 - 0.04%

1996-99 5.35%

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These figures suggest high manufacturing growth in the 1960s and 1970s, decline in the

early 1980s followed by a recovery in the late 1980s, decline again in the early 1990s and

recovery in the late 1990s.

The structural transformation involved in development implies that the rising importance

of manufacturing in the economy is an indicator of industrialisation. The proportion of

manufacturing in gross domestic product is an indicator which is less susceptible to

inflation problems, however different deflators are appropriate for GDP and

manufacturing GDP, so there are still discrepancies based on whether current or constant

prices are used.

The following graph illustrates manufacturing value added as a percentage of GDP in

Tanzania according to different sources:

8

This suggests the rising importance of manufacturing during the 1960s and early 1970s,

falling importance in the late 1970s and early 1980s, some recovery in the late 1980s,

falling importance again in the early and mid 1990s, followed by some recovery after

1997.

Manufacturing exports

Another indicator of the strength of the manufacturing sector is manufacturing exports.

Government authorities are more involved in monitoring exports than output.

Unfortunately the quality of trade data in developing countries generally is also very low

(Yeats, 1990). Bol (1992, p.6) estimates that smuggled exports are highly significant in

Tanzania. Trade may involve over and under invoicing in order to avoid foreign

exchange regulation, which was very stringent in Tanzania up to the mid 1980s. There

are differences in data from the Bank of Tanzania, the Bureau of Statistics and the Board

of External Trade (Musonda, 1995, p.31). For manufactured exports from Tanzania in

1981, UNCTAD report a figure of $58m, the ECA $76m and the World Bank $71m. For

1985, the ECA reports $35m while the World Bank reports $45m (Riddell, 1990, p.30).

Manufactures exports as a percentage of total exports fell from 14% in 1980 to 6% in

1983, rose again to 15% in 1987 and fell to 10% in 1997 (World Bank). This indicator

has declined every year during the 1990s with the exception of a temporary upturn in

1994 and 1995 (Shitundu, 2000, p.4).

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Employment data are sensitive to how seasonal, part-time and casual labour are

accounted for (Srinivasan, 1994). According to UNIDO data, the number of employees

in manufacturing grew from about 56,000 in 1965 to 209,000 in 1981, fell to 187,000 in

1985 and rose to 253,000 in 1991.

Source: UNIDO

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The context in which these developments took place

In Tanzania, post-independence development policy highlighted the role of industry, as

part of a policy of self-reliance. Industrial development started from a very small base,

and expanded steadily between 1961 and 1977 (Skarstein and Wangwe, 1986).

During the late 1970s the combination of the oil price shock and falling agricultural

export quantities and prices with attendant foreign exchange shortages, began a period of

industrial decline. There was a small recovery in the second half of the 1980s when

structural adjustment programmes were introduced, but it was based on using more

capacity again when foreign exchange constraints were lifted, rather than the beginning

of a sustained increase in both capacity creation and capacity utilisation. There was a

slow down again in the early 1990s due to import competition, which especially affected

the textile sector (Kweke et al, 1997, pp.14-17).

Important manufacturing sectors in Tanzania

In the early 1960s, protection aided the development of simple consumer goods industries

(Skarstein and Wangwe, 1986; Silver, 1988). In 1975 the "basic industry strategy"

emphasising self reliance focused on capital goods industries such as iron and steel, metal

work and engineering, chemicals, cement, glass and wood in order to provide inputs to

food processing, textiles, leather and construction (Silver, 1988).

Since the mid 1980s, the focus has again turned to consumer goods when the policy of

self reliance was abandoned in favour of trade integration.

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Percentage of value added:

1961 1982 1999

Consumer goods 74% 54% 64%

Intermediate goods 23% 35% 25%

Capital goods 3% 12% 11%

(Skarstein and Wangwe, 1985; and Tanzania planning commission, 2000, p.133).

Food Processing 51.4% 36.0% 14.7% 37.7%

Textiles 2.8% 15.2% 56.2% 29.6%

Wood 4.6% 2.8% 6.9% 6.7%

Paper 7.4% 6.0% 3.5% 6.0%

Chemicals 16.0% 14.1% 10.7% 5.2%

Non-metal 3.2% 4.0% 0.6% 3.4%

Metals 13.6% 21.2% 8.0% 1.1%

ALL 100.0% 100.0% 100.0% 100.0%Based on enterprises with at least ten full time employees.Source: Republic of Tanzania, Bureau of Statistics, Statistical Abstract, 1995 in (Grenier et al, 1999, p.5). See appendix for more detailed description of manufacturing sectors in Tanzania.

This table shows that food processing, textiles, metals and chemicals are important

sectors. However, metals and chemicals contribute very little to employment relative to

value added, whereas textiles add very little value relative to their output and

employment. Textiles and wood products are the more export-orientated sectors.

Industrial policy institutions in Tanzania

The Ministry of Industries and Trade is the prime department involved in industrial

policy; however other relevant Government Ministries include Communication and

Transport, Education, Science Technology and Higher Education, and Energy and

Minerals.

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Within the Department of Industries and Trade, relevant institutions include the Board of

External Trade, Tanzania Bureau of Standards (TBS), Small Industries Development

Organisation (SIDO), Tanzania Engineering and Manufacturing design organisation

(TEMDO), Tanzania Industrial Research and Development Organisation (TIRDO) and

Fair Competition Commission (TPC).

The National Development Corporation (NDC), established in 1962, is an important

public institution with the aim of facilitating development through infrastructure and

catalyst projects, and through coordinating the development of human resources, and

functions through projects such as the Mtwara Development Corridor. It prioritises

projects with positive impact for the country in terms of value addition, foreign exchange

earnings or savings; employment creation; technological advancement and poverty

eradication (National Development Corporation website).

Strengthening and co-ordinating these institutions along a common framework are

necessary to make industrial policy more effective.

Structural adjustment critique

A combination of internal and external factors brought the Tanzanian economy, including

the manufacturing sector, into crisis in the early 1980s. The official exchange rate was

very overvalued. While this made imports cheap for those who could obtain foreign

exchange; poor export performance, deteriorating terms of trade and a lack of aid caused

severe foreign exchange shortages and rationing (Grenier et al, 1998, p.2). Procedures

for obtaining foreign exchange and import licences were very bureaucratic and slow

(Kanaan, 2000). Many manufacturing industries which depended on imported inputs

were constrained, and utilised low proportions of their capacity (Skarstein and Wangwe,

1985). Inflation of the order of 30% in the early 1980s also created an unstable

environment for investment (Grenier et al, p.3). Prices of over 400 commodities were

state controlled, leading to a lack of adjustment to changes in supply and demand (Kweke

et al, 1997, pp.8-9).

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Reforms were clearly needed. However conditionality on aid meant that reforms had to

follow the structural adjustment programme of the international financial institutions if

much needed supporting aid was to be secured.

Structural adjustment programmes involve liberalisation of prices, including devaluing

the exchange rate and relinquishing controls on domestic prices, privatisation of state

enterprises, state withdrawal from banks' credit decisions, reduction of fiscal deficits

through reducing state spending (which affects social services, infrastructure and the

capacity of state administration), and trade liberalisation - reducing tariffs and quotas and

relinquishing import controls. It assumes firstly that markets and a vibrant private sector

will emerge, and secondly that they will work towards development.

Trade liberalization neglects the role strategic protection can play in industrial

development, by supporting import substitution in the home market as a base for export

growth (Wangwe, 1995a, p.198). Structural adjustment programmes involve unilateral

trade liberalisation and preclude the preferential tariffs which support regional

integration. Empirical work such as Sachs and Warner (1995) which suggests trade

liberalisation leads to growth has been undermined by critiques that such studies are

highly sensitive to how openness is defined (Pritchett, 1996; Rodriguez and Rodrick,

1999). East Asian countries could be defined as open under Sachs and Warner's criteria,

but did not liberalise trade in the way structural adjustment programmes require.

As regards privatisation, the state-enterprise relationship is more complex than public or

private ownership (Bayliss and Cramer, 1999), and private ownership is sometimes not

necessary, and never sufficient, to ensure productivity improvements. Public enterprises

have played a key role in providing infrastructure for, and directly participating in,

industrial development in present industrialised and newly industrialised countries

(Chang and Singh, 1993). In studies of samples of exporting firms in Tanzania, publicly

owned firms have better export records than the private ones (Bagachwa and Mbelle,

1995; Grenier et al, 1998, p.18).

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The emphasis on deregulation and lack of government involvement in the private

economy precludes a role for strategic credit, promotion, competition and mergers

policies. Tanzania's export subsidy for manufacturing, which could be used as a tool to

create incentives to make manufacturing firms become internationally competitive, was

abolished under pressure from the International Monetary Fund in 1986 (Musonda, 1995,

ch. 7). Financial liberalisation can lead to financial crises, and prevents the state

directing credit to priority key industries. In a risky environment, over-investment in

more secure non-tradable sectors, or in trade rather than production, can lead to amplified

business cycles and a lack of foreign exchange. In Tanzania, large scale lenders lack

information on small scale borrowers, and growing numbers of small scale informal

lenders lack links with large scale lenders for finance (Nissanke, 1998), so successful

small scale enterprises with the potential to expand lack finance to do so. An important

leadership role for the state is needed for the establishment of information and

institutional linkages in financial markets.

The fiscal austerity in structural adjustment programmes meant that adequate

development of skills and infrastructure could not be financed, and aid projects which

required counterpart funding by the state were cut back (UNCTAD, 2000, ch. 6). This

has implications for long term prospects for industrialisation.

Proponents of liberalization and structural adjustment have also argued that international

institutions (eg the World Trade Organisation, International Financial Instutitions) should

limit the discretion of state action by developing countries so they can credibly commit to

liberalisation (Riedel, 1990). This assumes firstly that liberalisation is the best policy and

secondly that the development of other institutional commitment mechanisms to specific

policies is not feasible. State capacity to pursue active industrial policy has been

undermined through lack of resources, policy conditionality and international pressure to

commit to liberalisation.

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Tanzania began its main structural adjustment programme in 1986 (Bennell, 1998,

p.629), although there were Structural Adjustment Programmes over the period 1982/3 to

1984/5 involving some World Bank funding. The Economic Recovery Programme

covered the period 1986-90, and the Economic and Social Action Programme the period

1990-95 (Grenier et al, 1998, p.2).

Structural adjustment has focused on "getting the prices right", and forcing adjustment in

demand rather than facilitating increases in supply, leading too often to the closure of

manufacturing firms, rather than to their restructuring (Bennell, 1998, p.621). This has

led to a process of "de-industrialisation". The World Bank (1994) has refuted the

existence of de-industrialisation in Sub-Saharan Africa, but Bennell (1998) provides a

convincing critique of the methodology used in its refutation. Structural adjustment

policy has neglected the particular role of industry in development (Riddell, 1990, p.3),

instead treating all sectors alike.

There was an initial increase in manufacturing in the 1986-1990 period. During the

1970s, capacity creation had been linked to foreign aid, while capacity utilisation was

linked to foreign exchange from agricultural exports (Wutz, 2001, p.431). The cotton

processing sector experienced high investment, but there was insufficient capacity

utilisation (Gibbon, 1998). The decline between 1981 and 1985 was due to foreign

exchange constraints from an overvalued exchange rate and bureaucracy in import

controls and foreign exchange allocation. The temporary recovery between 1986 and

1990 involved the relief of these constraints due to a coffee boom in 1986, a lower

exchange rate, aid tied to the adopting of a structural adjustment programme, and the own

funds foreign exchange retention scheme (Babachwa and Mbelle, 1995). Tanzania had

excess capacity which could be quickly brought into production when spare parts and

inputs could be imported (Bennell, 1998, p.632).

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However, this could not be sustained into the 1990s, as import competition forced many

firms out of business. This was the case for the textile industry, which experienced many

closures in the early 1990s (Gibbon, 1998). There was an increased degree of turbulence

and firm closures (Blanc, 1997). However, in the mid 1990s employment continued to

fall, but labour productivity and sales began to recover and capacity utilisation rose.

Domestic competition, especially in textiles, increased.

Policies introduced to promote exports have had some measure of success; the export

retention scheme in Tanzania has been successful in both relieving foreign exchange

constraints for some firms and in creating export incentives (Wangwe, 1995a, p.113), and

the elimination of export restrictions in 1999 makes exporting administratively easier for

businesses. In addition, the privatisation part of structural adjustment has had a mixed

performance, with some firms recording improvements in investment, productivity,

technology, marketing and efficiency (Kweke et al, 1997. p.31). However, reforms were

not sequenced properly, with trade liberalisation preceding export promotion and

privatisation preceding restructuring and emergence of potential indigenous investors

(Kweke et al, 1997, p.10), which has led to the lack of high rates of manufacturing

growth in the 1990s.

Difficulties of an active state industrial policy

Arguments against the structural adjustment programmes advocated by the international

financial institutions are not arguments against important roles for the private sector, or

arguments for full scale state planning. No one actor, including the state, has complete

information on the potential of different industries and the relative costs and benefits of

developing them. Competition in the presence of market incentives is a useful discovery

procedure (Hayek, 1968) and an important tool in finding out which industries are

viable, despite the market failures present in developing countries. State prioritisation of

some industries and intervention to alter market incentives should not inhibit

experimentation in other industries. State industrial policy requires a good information

base and a clear rationale.

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Protection and promotion policies can also fail due to the political economy of

implementing such policies. Those who have a stake in specific industries may induce

the government to protect and promote their industries by various legal and illegal means

(lobbying, political contributions, bribery). This is known as rent-seeking and is the

subject of a substantial literature (Jomo and Khan, 2000). Rent-seeking may (but does

not necessarily) result in the promotion of unsuitable industries, or promoted industries

remaining dependent on protection and promotion rather than using it as a platform to

develop higher productivity.

Government "picking winners" or rather "choosing which winners to create" is itself an

organisational capacity. For example, MITI in Japan did this through consulting experts

from industry, universities, banks, trade unions and the media (Wangwe, 1995a, p.79). In

order to implement active industrial policy without the pitfalls described above, three

conditions are necessary - information, clear development objectives and credible

incentives. Firstly, as outlined above, a developed and dynamic information base is

needed for state decision making and monitoring. Secondly, the criteria on which targeted

industries are to be chosen must be well-defined and the choice of particular industries

rationalised with respect to these criteria, in order to avoid the choice of unproductive

rent-seeking industries (Ocampo and Taylor, 1998). Thirdly, promotion and protection

must be made conditional on predefined productivity improvements, in order to create

incentives.

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These conditions are not simple to fulfil. The first requires state capacity in terms of

finance, information, institutions and human resources, and is made difficult by the fact

that an industry's characteristics and the characteristics of the wider conditions in which it

operates are often difficult to measure or even to observe. The third is also not

straightforward, as defining the conditions of promotion ex ante can be difficult due to

the problems in defining ex post to what degree successes or failures are due to industry

effort or to exogenous changes in conditions. In addition, the withdrawal of promotion

may have well defined losers and undefined winners, making it politically difficult to

make credible threats unless the long term advantages of such threats as incentives are

widely perceived.

The second condition is the subject of more detailed analysis in this paper. While the

importance of an active state industrial policy has been discussed in the literature

(Amsden 1997; Wade, 1990), the choice of which industrial sectors and businesses to

prioritise in promotion has not been so extensively analysed. The separation of the

discussion about criteria for allocation of support from discussions of which actual

businesses to support strengthens the hand of those arguing for allocation on the basis of

criteria rather than in the interests of specific businesses. Industrial policy must serve a

range of short-term and long-term objectives in order to bring about development.

Choosing industry

Choosing which industries and which investment projects to support is not

straightforward. The criteria on which a state can judge the desirability of an investment

are wider than those which private investors use, i.e. profit, risk and factors which affect

them. The state must consider the effects of an industry on the wider business

environment and economy, rather than only its private rate of return within a given

environment.

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Classifying sectors within manufacturing is multi-dimensional rather than uni-

dimensional. The International Standard Industrial Classification classifies according to

"what is in most countries the customary combination of activities described in statistical

units" (UN Statistics Division), for example food processing, apparel, wood, paper,

chemicals, non-metallic minerals, metals and machinery and equipment. However, two

techniques of production for products in the same ISIC activity classification could be

classified differently according to whether they are labour or capital intensive; two

different products in the "apparel" category could be in demand more in domestic or

foreign markets or two products in the metals category could have very different end

uses. Production of different types of products for very different types of markets may be

similar in terms of skills needed. These examples illustrate that activities which are

similar in one dimension can be different in another dimension. In addition, as

technology changes, the classification of an activity can change along certain dimensions

(Wangwe, 1995a, p.61).

Formulating a state industrial policy involves deciding the relative importance of each

relevant criterion (a political process), considering the merits of each of a wide range of

industries under each criterion, considering the interaction effects between different

industries, and establishing the combination of industries to be supported under the

industrial strategy.

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Static Vs Dynamic criteria

At a given time, a developing country has specific endowments of various factors of

production, such as natural resources, labour of various skill levels and skill types and

physical capital (equipment, machinery). In addition it has a certain level of

infrastructure, prevailing technology, and a starting point in terms of already established

business institutions, marketing knowledge and practises, and networks. Clague (1997,

Ch.2) sees institutional "endowments", i.e. the characteristics of the state, businesses,

markets and organisations, as part of a country's comparative advantage. In the short run,

a country has comparative advantage in those industries which use intensively the factors

in which it is most endowed, according to Hechsher-Ohlin theory. In the case of limited

government intervention, the industries in which a country has short run comparative

advantage in terms of factor endowments and prevailing conditions are more likely to

develop.

Foreign exchange has been a key constraint in Tanzania's industrial development.

Therefore a portfolio of industries, some of which generate foreign exchange in the short

term and some which need a longer time to develop, is needed.

However, dynamic growth has more importance than short term efficiency (Ocampo and

Taylor, 1998), and so the long term effects of an industry are most importnat. Shitunda

(2000) uses the revealed comparative advantage methodology to find sectors in which

Tanzania has comparative advantage. However, arguing that what a country exports it

has comparative advantage in and should therefore export more of, is a tautological

argument for expanding existing sectors. Encouragement of other industries in which a

country does not have short run comparative advantage, but which have potential for

productivity over the longer term, is what an active industrial policy entails.

21

It involves developing skills, prioritising infrastructure suited to specific industries,

promoting the adaptation of and investment in capital in directions other than those

private capital markets are pursuing, and promoting learning by doing, technological

development, market linkages, networking and marketing knowledge both domestically

and internationally.

Criteria for targeting industries

There are a wide range of criteria to be considered in analysing the costs and benefits of

different state industrial priorities. This paper divides them into thirteen areas.

Factors of production

Tanzania has a large amount of land - 883,590 sq km - and a low population density - 36

people per sq km in 1998 (World Bank). It does, however, have a high rate of population

growth - 2.6%. It has low levels of physical capital relative to its size and population. If

land, labour and capital are considered to be the most important analytical units for

analysis, the theory of comparative advantage would suggest Tanzania should specialise

in land and labour intensive activities, rather than capital intensive activities. This

implies specialisation in agriculture rather than manufacturing, and in labour-intensive

manufacturing within manufacturing.

Tanzania has among the lowest industrial wages in the world, and the minimum wage of

US$10.55 per month is significantly lower than that of Kenya (US$24.96), Mauritius

(US$44.85) and South Africa (US$273) (Kweke et al, 1997, p.37). This would suggest

that labour-intensive manufacturing would have a cost advantage in international

markets. Industries where unskilled labour comprises a large proportion of value added,

therefore, are likely to be more competitive internationally.

22

According to Bagachwa, (1992) more labour intensive activities include textiles,

footwear, furniture, wood and glass, while more capital intensive industries include

processed food, beverages and tobacco. However, it is clear that the relative intensity of

labour and capital depends on the specific type of good and the type of technology and

processes used.

The capital and labour requirements of industries should be studied, and the opportunity

cost of these resources considered. Upgrading the education and training level of the

whole population takes time and large amounts of resources, so supporting industries

which provide large amounts of employment competitively should be considered in the

short term.

However, developing these types of industries at the expense of more capital and skill

intensive industries risks locking Tanzania into a low-wage, low-productivity trap.

Investment in upgrading capital and equipment in order to increase productivity is very

important. In addition, the importance of intangible capital and investment in training,

networking and development of systems is increasingly important relative to physical

capital (Wangwe, 1995a, p.78). This increasing importance is reflected in theory, for

example endogenous growth theory (Romer, 1994) draws attention to processes such as

learning-by-doing, skills and human capital, and technology, although without providing

a useful theoretical framework in which to analyse these (Fine, 1998). In the context of

global trade integration, specialising in technology intensive rather than physical capital

intensive industries has more and longer term benefits.

Industries which are now labour intensive but which have the capacity to be increase their

labour productivity through tangible and intangible investment may present a good

balance between meeting immediate needs and supporting dynamic growth. Detailed

research into the different labour, capital and skill intensities of different industries and

their potential for upgrading from labour intensity is needed in order to formulate

industrial policy.

23

Linkages and vertical integration

Hirschman (1958) emphasizes the importance of linkages between firms and industries in

the development process. Industries vary in the degree to which they rely on linkages

with other domestic and international industries, and the degree to which they can be a

force in creating those linkages. In assessing the merits of support for an industry, the

potential that other industries supplying inputs to it or using its output could also be made

viable should be analysed. Supporting a group of industries linked to each other could

maximise external economies of scale effects.

Gibbon (1998) highlights how the development of cotton processing in Western Tanzania

is highly dependent on private marketing chains between each stage in the processing.

The information, communications, transport infrastructure and administrative support for

domestic markets are necessary in order to increase the linkages among domestic firms.

Wangwe (1995, p.103) argues that a lack of vertical specialisation has been a problem

among Tanzanian exporting firms, as has the inability to find reliable and competitively

priced local inputs. Specialisation generally facilitates productivity improvements, and

so a group of linked industries can be more successful than a single industry active in all

stages of a chain. Williamson (1985, Ch. 4) discusses the costs and benefits of vertical

specialisation and integration, which depend on asset specificity and the externalities

firms impose on one another. For example, investments in two stages in the production

process for a good may be mutually dependent, and either vertical integration or long

term relationships and contracts between firms are necessary to minimise opportunism,

i.e. one firm using the dependence of another on it to its own advantage. The relative

merits of different degrees of integration are also influenced by the degree to which the

state involves itself in the co-ordination of linked industries, and the legal infrastructure

for enforceable contracts.

24

Formulating industrial policy requires research into the existing linkages and networks in

Tanzania, how new or growing industries could develop linkages with the rest of the

economy, and establishing which industries would have greater positive externalities as

regards creating a better business environment for other activities.

Foreign market conditions

Experience in countries such as Ireland, South Korea and Japan has shown that

specialising in and exporting products which have growing international markets, such as

electronics and computer hardware and software can be a strong force for growth.

Specialising in products which are experiencing declining prices in the long term vis a vis

other prices means declining terms of trade and lower growth. Developing countries such

as Tanzania may also have potential in niche markets which have less competition

(Wangwe, 1995a, p.83)

Using the ISIC 4 digit classification, sectors with the fastest growing world exports (data

for exports from 74 countries) between 1981 and 1995 are:ISIC 4 digit classification Average

annual growth

1981 – 1995

Overall growth

1981 – 19953132 Wine industries 16.2% 635%3825 special industrial machinery and equipment except metal and wood-

working machinery15.1% 883%

3839 electrical apparatus and supplies n.e.c. 13.5% 661%3419 pulp, paper and paperboard articles not elsewhere classified 13.0% 494%3312 wooden and cane containers and small cane ware 13.4% 481%3559 rubber products not elsewhere classified 12.7% 514%3832 radio, television and communication equipment and apparatus 12.5% 587%3522 drugs and medicines 11.6% 528%3134 Soft drinks and carbonated waters industries 11.5% 450%3117 bakery products 11.5% 492%3233 products of leather and leather substitutes, except footwear and wearing

apparel14.1% 439%

3220 Manufacture of wearing apparel, except footwear 11.2% 459%

25

Tanzania already has paper, packaging and apparel industries, which have expanding

world demand. Success within these internationally highly competitive industries

requires upgrading skills, technology, systems and identifying niche sub-sectors. One of

the principal constraints to the development of industrial exports in Tanzania is access to

information, contacts and know-how to sell in foreign markets. Building up export

capacity involves government support in learning about quality standards, the

administration of international trade, and marketing practices and market characteristics

of other countries. Promoting exports involves reducing imported input tariffs and

ensuring a stable real exchange rate, reducing unnecessary bureaucracy around exporting,

establishing incentive schemes, providing export credit guarantees, and planning for the

infrastructural, transport, storage, marketing, information needs of exporters (Bol, 1992,

p.11).

The long term prospects for industries should be considered, in terms of the likelihood of

products becoming obsolete during technological change, or experiencing falling demand

due to changing tastes. The patterns of demand must also be considered, as some

industries experience more cyclical demand and therefore are likely to provide less stable

employment and require more flexibility. Markets which have a rapid pace of change

may require continuous investments in adaptation, research and training (Wangwe,

1995a, p.94). A lack of capacity to adjust to changing product quality requirements has

been one problem in Tanzanian exporting firms (Wangwe, 1995a, p.102).

In short, an analysis of present and potential future developments in world markets for

different industrial goods is important in formulating industrial policy.

26

Regional market conditions

Internal economies of scale mean that intra-industry trade can increase demand through

variety and lower costs (Ocampo, 1993). Trade within the African region has the

potential to allow countries to realise economies of scale and specialisation, without

having to be immediately competitive with industrialised countries (Page, 2000, p.25). It

allows the benefits of intra-industry trade without the lock-in effects of trade based on

comparative advantage vis vis industrialised countries, or the politically difficult

redistribution consequences of changes in returns to different factors of production

(Staiger, 1995). Wangwe's (1995) study shows that primary commodity processing

industries in Sub-Saharan Africa have been exported more to industrialised country

markets, whereas other more advanced industries have been more successful in regional

markets.

Hine (1994) describes the different types of regional integration; preferential trade, free

trade area, customs union, common market, monetary union and fiscal union. Regional

trade integration can be supported by agreement by countries in a region to impose higher

tariffs for non-regional imports than for regional imports, by institutional mechanisms

such as a clearing house to facilitate the administration of regional trade (Musonda,

1995), and through developing regional transport infrastructure. At present Africa

countries have predominantly a "hub and spokes" system of trade, i.e. each country

trading with industrialised country hubs rather than with each other (Wangwe, 1995a,

p.32). Regional agreements in the past have encountered obstacles of uneven benefits

between richer and poorer members, such as the agglomeration of foreign direct

investment in Kenya in the former East African Community, which collapsed in 1977

(Musonda, 1995, ch.7), (Wangwe, 1995b, p.37). A similar process could be happening

with South Africa in the Southern African Development Community. For this reason, a

system of inter-country transfers for infrastructural development and co-ordinated

industrial policy is needed (Skarsten and Wangwe, 1985).

27

Regional integration can cause capital and industries to be more mobile within the region,

and the effects of this on workers depends on the mobility of people within the region

(Hine, 1994). Regional integration may increase regional foreign direct investment due to

agglomeration effects, or decrease it due to a decrease in tariff jumping (Bloomstrom and

Kokko in Hine, 1994). The effects of regional integration on a range of economic factors

must be considered.

Tanzania withdrew from the Common market for Eastern and Southern Africa in 2000

(Kanaan, 2000), due to fears that the introduction of free trade within the region would

have uneven benefits, which Tanzania would not share. Tanzania is a member of the new

East African Community which was re-established in 1999 (Mbelle, 2000, p.20), and of

the Southern African Development Community, which is less demanding in terms of

lowering tariff barriers. There is a need to rationalise Tanzania’s involvement in regional

integration organisations (Wangwe, 1995b, p.38), and to establish mechanisms whereby

the industrialisation of poorer members of regional organisations is facilitated by

membership.

Examples of sectors with largest growth in imports to Africa countries are similar to

those with high growth in world markets, but also include the following: (data for 11

countries)

ISIC 4 digit category Average annual growth

1981 - 1995

Overall growth

1981 - 19953213 Knitting mills 12.3% 544%3122 Manufacture of prepared animal feeds 11.5% 491%3831 Manufacture of electrical industrial machinery and apparatus 11.5% 509%3521 Manufacture of paints, varnishes and lacquers 11.1% 454%3842 Manufacture of railroad equipment 12.3% 406%

28

Targeting industries with particular growth potential in African markets can allow

experience in exporting to develop as a step towards more competitive world markets.

Coordination of industrial policy with other countries in Eastern and Southern Africa may

have implications for which industries are targeted. For example, a mutual agreement for

a group of countries not to target the same industries for state support, in activities where

the regional market is small, would prevent too much competition. Such mutual

agreements must allow a distribution of industries between countries which does not

force less developed countries to be locked into lower productivity activities, if less

developed countries are to benefit from the arrangement. Policy as regards preferential

import tariffs for certain regional manufactured products would help these products

compete with imports from industrialised countries, and developing the ability to tailor

products for regional markets would also help in this regard.

In summary, industrial policy formulation requires research into the market conditions for

various manufactured products in regional markets, and co-ordination which industries

are targeted with other governments in the region.

Home market conditions

Mundle (1985) emphasises the role of the home market in industrial development. The

home market is the only one which can be secured, and trade protection brings in

government revenue rather than costing government revenue, as subsidies or tax

concessions do. The effectiveness of trade protection as an instrument of protection is

heavily dependent on the home market. For example, trade protection aimed at

promoting the production of luxury consumer goods in Tanzania would be unlikely to be

effective due to the small size of the Tanzanian market in such products. In contrast,

trade protection for textiles production would be an effective promotional instrument.

Import substitution and export orientation can be complementary policies (Wangwe,

1995a, ch.6).

29

Focusing on industries which supply inputs to agriculture, such as fertilisers and

agricultural equipment ensures a sizeable home market and helps the development of

agriculture without the foreign exchange consequences of high levels of agricultural input

imports. However, if such industries are to be supported, care must be taken that prices

for the agricultural sector are adequately low.

Industries which supply consumer goods which are in high demand in rural areas such as

textiles and clothing, food and beverages, building and transport goods, soap, matches,

radios etc can be an important factor in increasing incentives for agricultural productivity

and sales (Berthelemy and Morrison, 1987).

During the 1990s, Tanzania's imports were as follows:Non food consumer goods 19%Machinery 19%Transport equipment 17%Industrial raw materials 15%Oil 11%Building and construction 7%Food and food stuffs 6%Miscellaneous goods 4%Fertilisers 1%

(Bank of Tanzania)

This shows that consumer goods have a high potential for import substitution. Success in

heavy capital goods industries requires large physical investment and long time scales.

Developing a few specialised capital goods industries is likely to be more feasible than

attempting to substitute imports across a wide range of capital goods, as integration into

world markets allows capital goods needs to be met by imports, and predicting the types

of domestic capital goods demand into the future may be very difficult, making

investment substantial and risky.

It is important that protecting industries in the home market is made conditional on them

achieving growth in exports, at least in the medium term. If this is not emphasised,

industries may come to depend on the protected home market and may not become

internationally competitive.

30

Formulating industrial policy requires research into the domestic market for different

goods, and likely developments in it, in order to assess the potential for building export

capacity though import substitution.

Technology

The type of technology an industry needs, the existing technological capacity, equipment

and know-how in a country, and the potential for an industry to increase the availability

of technology and upgrade technological know-how and equipment in a country thereby

having positive externalities on other sectors, are important considerations in choosing

industries to support.

The science-push view of technological progress sees it as a linear process, starting with

invention, followed by innovation (the first commercial application of an invention by a

firm) and then by diffusion, the spread of the innovation to other firms. Invention,

innovation and diffusion are seen as an exogenous processes unaffected by economic

conditions or incentives (Kennedy & Thirlwall, 1972). The market driven view, by

contrast, sees invention, innovation and diffusion as responses to economic incentives

(Schmookler, 1966). In reality, economic conditions and technological developments

both affect each other and are affected by exogenous factors.

Firms which are less competitive can adopt technology of more efficient firms, develop

their own technology of similar or superior efficiency, or a combination of both

(adaptation). Adapting technology can be less expensive, less risky and less time-

consuming than developing new technology independently (Schumpeter 1934).

31

The transfer of technology depends on four factors.

Firstly, the nature of the technology. Some forms of technology may be transferred by a

simple communication of instructions, while others require extensive guided learning by

doing (training).

Secondly, the characteristics of technology holders and learners. Abramovitz (1990) sees

technological congruence - the similarity between holders and learners in terms of

products produced, nature of markets and market size, and factor endowments - as

crucial.

Thirdly, the nature of communications. Communications technology, but also

institutions for communication and learning are important. Ohkawa (1994) terms this a

"social capability" to learn from certain sources, comprising levels of general education

and political, commercial, industrial and financial institutions.

Fourthly, the incentives of technology learners and technology holders. The incentives of

technology holders affect whether technology is transferred either against the wishes of

the technology holder, with the indifference of the technology holder, or deliberately by

the technology holder. In the first case, transfer of knowledge requires the learner to

"reverse engineer", or acquire knowledge through mobility of people between firms. In

the second case, proactive action by the learner to find and research knowledge is

required. In the third case, knowledge can be transferred through simple instructions or

through guided learning-by-doing (training). The incentives of learners can stem from

competition, or conditions attached to state support.

32

If support from technology holders for learning is needed in order to learn, then

incentives for them to transfer technology can be created in a number of ways. Firstly, if

the technology holder is a public institution (either domestic or foreign) it may have

dissemination as a policy. Secondly private firms which hold technology may teach in

exchange for learning, through technology sharing cartels or the mutual exchange of

technology in joint ventures. Thirdly private firms may have money as an incentive by

selling technology, for example in selling intellectual property rights, or selling training

services. However, many types of knowledge cannot be sold, as the buyer has no way of

knowing the quality of what is being bought before buying it. In addition, private firms

may be unwilling to sell knowledge which would increase the productivity of its

competitors. Fourthly, foreign direct investment creates an incentive for technology

dissemination, as the firm benefits if the productivity of the subsidiary increases. It

internalises the externality of knowledge dissemination, thus creating incentives for it.

Foreign partners can be very important such as in the cases of Northern Electrical

Manufacturing in Tanzania, which received the support of a Swedish firm through a

Swedish aid scheme, in provision of equipment, training, import support and support in

export marketing to Sweden (Bagachwa and Mbelle, 1995).

Industries which increase the domestic availability of technology, such as computer

hardware and software industries, engineering industries and capital equipment industries

are especially advantageous.

In summary, industrial policy formulation requires research into the characteristics of

technology in different industries - the degree of adaptation required and the conditions

and incentives required for technology transfer.

33

Skills

Tanzania has low general education levels. 1997 figures indicate that an estimated 26%

of adults are illiterate, and 10% of young adults are illiterate (World Bank). Only 48% of

children of primary school age are enrolled (net figure) (WDI 1997), while for every

hundred children of primary school age, 67 children are in school (some of whom are not

of primary school age) (gross figure). 5.6% is the gross enrolment rate in secondary

school, and 0.6% (17,800 students) the gross rate in tertiary education. These figures

must be treated with caution, as they often reflect only enrolment or first day attendance,

and do not indicate quality.

Fiscal austerity involved in structural adjustment programmes has meant that provision of

education has fallen steeply from a peak rate of 94% primary enrolment in 1981 (World

Bank; Knight and Sabot, 1990). Enrolment in secondary and tertiary education has been

continuously rising.

Education is a public good and training is a quasi-public good. Firms do not have

adequate incentives to provide training, as their trained workers may be move to other

firms. For this reason, state bodies have a role in providing broad based education and

training colleges, encouraging industry associations to provide industry specific training

and supporting firm-provided training (Biggs et al, 1995). Educational policy should

focus on key skill constraints in the short term and long term needs. Even an unskilled-

intensive industry may face skill constraints in management and technical positions.

34

Industries which use large amounts of unskilled labour, such as assembly or basic textiles

can be useful in order to generate employment for a rapidly growing population with little

or no basic education. In the long term, however, investment in skills through primary,

secondary and tertiary levels of education, on the job training and targeted courses in

specific industry skills needs to be planned with the needs of prospective industries

needing higher skill levels. It is important that investment in education is met by

appropriate employment opportunities (Amsden, 1997); therefore education and

industrial policy need to be coordinated.

Existing skills in production and marketing which have been built up through experience

and learning-by-doing should be built on, and loss of such skills through closures and

turbulence minimised. In the short term existing skills may favour the further

development of existing industries rather than new ones; however, in the long term, the

feasibility of transferring specific skills to new types of industry should be analysed.

Skill development is also an important consideration in a foreign direct investment

policy. It is important to use Tanzania's bargaining power in terms of the support it can

offer to foreign direct investors in order to obtain commitments to developing the skills of

its non-expatriate employees.

In summary, the educational and skill requirements of different industries, and their

capacity to upgrade skills, need to be researched in the formulation of industrial policy.

Employment

Tanzania has a labour force of 16.4million (1998) (World Bank). Manufacturing can

play an important role in creating employment for large supplies of labour in a growing

population (Lewis, 1958).

35

Industries differ in the type of employment they create. For example, working conditions

in certain unskilled-intensive industries in export-processing zones in Asia, Latin

America, Central America and the Caribbean have led to long-term health problems,

hazardous conditions leading to fires, and over-crowded living conditions. Different

types of employment have different potential to allow employees to develop their skills,

or to be promoted.

The gender dimension of industrial employment must also be considered. In many

developing countries, low-skilled assembly or textiles industries often employ mainly

young women. Employment policy may influence whether employment creates new

opportunities for women, or alternatively creates and enforces sharp divisions in the

quality and type of employment available for men and women. Employment can support

whole families or only contribute only a small part of a family income. It may be part-

time or full-time, seasonal or permanent. While casual and part-time employment or

employment of large numbers of young people for a short number of years who

contribute to their families incomes may provide important opportunities for

supplementing family incomes, manufacturing enterprises which provide more

permanent long-term employment with better pay and conditions are very much

preferable. Attracting foreign direct investment through the suppression of unions and

the lowering of safety standards risks locking Tanzanian employees into bad working

conditions.

For many of the poorest in Tanzania and elsewhere, wage labour opportunities are a key

escape-route from poverty (Sender and Smith, 1990). Industrial development can be

targeted at poverty alleviation through ensuring that employment is appropriate for those

who do not have the means to move to a new location or access formal education, and for

poorer women. The implications of employment structure for inequality is also an

important consideration.

In summary, choosing industries to target requires research into working conditions and

the nature of employment different industries generate.

36

Location

At present manufacturing activity is very unevenly spread geographically within

Tanzania, with some regions having only one or two industries (Kweke et al, 1997, p.32).

Manufacturing value added by region (million TSch)Arusha 199,066Dar es Salaam 67,738Morogoro 14,546Tanga 9,589Kilimanjaro 8,663Iringa 8,622Mwanza 5,757Mbeya 4,443Coast 2,163Shinyanga 2,079Mara 1,366Kagera 1,040Dodoma 1,026Tabora 768Ruvuma 365Singida 120Lindi 55Kigoma 45Mtwara 31Rukwa 5

(Tanzania planning commission, 2000. p.143)

Industries have varying requirements as regards location - especially for infrastructure,

proximity to business services, the quantity and quality of the local labour market, and

proximity to natural resource inputs. Heavier industries are likely to be more successful

if located near port facilities. Light industries with lower transport cost per product

value, industries with less dependence on sophisticated business services and

infrastructure, or industries which process primary commodities may be more feasible

located in smaller urban centres, or in rural areas. The location of domestic and regional

markets is also an important factor in determining the location requirements of different

industries.

37

Policies which involve developing the poorer regions (including those in Southern

Tanzania) will require providing adequate industrial infrastructural facilities there. This

may be important in order to slow urbanisation to a rate at which adequate urban living

facilities can be developed. 5% of Tanzania's population was urban in 1960, compared to

31% in 1998. The population overall has increased from 10.2million to 32.1million, and

the urban population has increased from 480,000 to 9.8million.

However, the industrial growth that can be achieved through local agglomeration effects

should not be underestimated, and so targeting a number of "industrial growth centres"

and catering for the ensuing migration may be more successful than aiming for more

evenly dispersed industry.

In summary, the choice of industries to target must be coordinated with regional and

urban/rural policy, and the requirements of different industries as regards location must

be assessed.

Infrastructure

Related to location is the consideration of infrastructure. Different industries can have

very different infrastuctural needs for energy, water, waste disposal, transportation and

communications. The costs of developing this infrastructure, the extent to which an

industry can provide for its own infrastructural needs, or support the development of

private sector infrastructural services, and the degree to which infrastructure for one

industry could support other potential industries are important considerations.

38

Industries are unlikely to be competitive unless they have the support of similar

infrastructure to their competitors in other countries. Public investment in infrastructure

can have a "crowding in" effect (Amsden, 1997), i.e., it can cause an increase in private

sector investment. In Tanzania, privatisation of railways, air services and harbours is

envisaged (Kweke et al, 1997, p.39). However, the externalities provided by these

services calls for continued state involvement in ensuring high standards.

The energy needs of industry are an important infrastructural consideration. Tanzania has

high electricity costs, and unreliable supply, relative to neighbouring countries (Kweke et

al, 1997, p.39). 75% of electricity is generated using hydro, and 25% using oil (1997)

(World Bank). Oil imports, for electricity and for private generators and transport,

present a large foreign exchange requirement, while Tanzania's hydro potential has

already been much developed. Energy imports were $138m in 1998. Renewable energy

industries such as solar panels and appliances could combine a high technology and

rapidly growing industry with skill development, linkages with rural domestic market,

export potential and catering for the energy needs of other industries.

In summary, providing a high standard of infrastructure can be an important way of

supporting domestic industry and attracting foreign direct investment. The infrastructural

needs of industries and the potential for different industries to make use of the same

infrastructure, must be analysed in formulating industrial policy.

39

Environment and natural resources

Industries can have a number of different environmental impacts. Some industries

pollute the air, some pollute water, some produce large amounts of hazardous or non-

hazardous waste which may be partly dealt with by public utilities. Some industries may

make heavy use of resources such as land or water, while some may use natural resources

as inputs, for example the wood and furniture industries or primary commodity

processing industries.

Tanzania's natural resources include mineral resources such as diamonds, gold, nickel,

phosphates, copper, gemstone, iron and lead plus a range of industrial minerals, coal,

natural gas, high solar power potential, fish and forests (Indian Ocean Rim Network).

The development of the wood industry necessitates good forest management, including

the multiple functions of forest for fuel, wood, nuts, oils and animals, protection for soil,

watersheds and bio-diversity. The scale of development of all industries based on

processing primary commodities (such as agricultural primary commodities, fish, wood

and minerals) are linked to environmental policies in the primary commodity sector.

Industries that are heavily dependent on renewable or non-renewable natural resources

mean that these resources must be well managed to ensure sustainability and minimise

negative effects on agriculture and tourism sectors, and on peoples' living environment.

Resources that are scarce worldwide mean that substantial rents can be obtained from

their exploitation.

Theorists who have put forward the idea of environmental Kuznets’ curves argue that

environmental quality first declines with economic growth, the expansion of the

manufacturing sector and the necessity of keeping costs down. They argue that beyond a

certain level of incomes, environmental standards improve as the services sector grows

and people demand the "luxury" good of a clean environment. Stern (1998) provides a

critique of this approach. The empirical support for this hypothesis is very sensitive to

what type of pollution or environmental degradation is being discussed, and on discrete

40

developments in cleaner and abating technologies and methods. Environmental

improvements have also been contingent on the rising political power of environmental

non-governmental organisations, and the politics of which groups in a society suffer and

which benefit from pollution. The environmental Kuznets curve hypothesis assumes that

environmental problems are reversible, and easily so.

In Tanzania there are 0.26 kg of organic water pollutant (BOD) emissions per day per

industrial worker (1991). This compares unfavourably with other countries where figures

range between 0.08 and 0.34. The food industry contributes 65%, the textiles industry

12% and the paper and pulp industry 11% of this pollution (World Bank).

Incorporating environmental considerations into industrial policy involves targeting

industries that cause less environmental damage, or that have the potential to become less

environmentally damaging and where environmental damage is reversible. Waste from

one industry may be useful in other industries, and such possible linkages should be

examined. Incentives can be created so that industries will move to technologies which

are better environmentally, as they invest. Economic incentives to reduce pollution must

be as closely as possible linked to pollution levels or dynamic improvements in pollution,

but consideration of information, monitoring and enforcement costs, as well as flexibility

and distributional impact, may also be important (Blackman and Harrington, 1999).

Dynamically it is important that developing countries do not lock themselves into a long

term specialisation in "dirty industries" due to using lower environmental standards, and

the weaker political organisation of victims, as incentives to attract foreign direct

investment.

Under the Kyoto protocol's Clean Development Mechanism, industries which put in

place measures to reduce their carbon dioxide emissions may be able to access

international aid. There are also opportunities for securing international aid for the

development of industries based on renewable energy, such as solar energy appliances.

These mechanisms present new opportunities for combining environmental policy with

supporting manufacturing.

41

In summary, the environmental impact of different industries and the environmental

policies for different industries, should be considered in formulating industrial policy.

Business institutions and competition structure

Business institutions include chambers of commerce, associations of firms of the same

industry, industry research organisations, employers’ federations and unions. They are

important for networking and creating linkages as discussed above, for developing

industry specific training programmes or infrastructure, and for facilitating and

structuring communication between an industry and government, universities, and other

organisations.

There are several general business associations in Tanzania, such as the Tanzania

Chamber of Commerce Industry and Agriculture (TCCIA), the Confederation of

Tanzania Industries (CTI), the Tanzania Private Sector Foundation (TPSF) and the

National Business Council (TNBC) which was launched in April 2001. However,

assessment of the particular co-operation needs of specific industries is also necessary.

The existence of these types of institutions in a particular industry may favour that

industry as potentially successful as a target industry, whereas a lack of development in

this area of a target industry may necessitate more state support for a given level of

progress. Different industries have different requirements as regards inter-firm co-

ordination and communication with other sectors.

Different industries may also have different requirements as regards competition policy.

In South Korea's industrial development, the government directed mergers when

competition was hindering the development of industries in order to give monopoly

power in the domestic market, to make use of economies of scale or to reduce

42

opportunism. However, domestic competition can be an effective tool in creating

incentives for productivity improvement, especially in industries protected from

international competition. In some cases, cooperation between firms in the same

industry can have important benefits, as discussed above, while in other cases where

external economies of scale are not as important or more incentives are needed,

competition may be more appropriate.

The cooperation and competition structure of potential target industries need to be

considered, as they have implications for potential productivity improvements, and the

country’s capacity to adapt to changes and new market entrants and exits.

Ownership and investment

Firms can be privately owned by Tanzanians, resident ex-patriates or foreigners, publicly

owned, or some combination of these. Ownership may be as portfolio investment only,

or have a more controlling role.

As discussed previously, the form and degree of public ownership is only one aspect of

the state-firm relationship. In 1990 in Tanzania, over 3 million public owned enterprises

provided 24% of formal employment, contributed 10% of GDP, and comprised 43%

gross domestic investment (World Bank). Industrial policy should consider the potential

for the state to provide investment funds, the external effects of industries and the

capacity of the state to exercise control without ownership, and the structure of

incentives, in considering the best ownership structure for targeted industries.

The potential for private domestic ownership and investment depends on productivity

improvements in the agricultural sector, retained industrial profits, and aid from

industrialised countries. Domestically owned firms are less likely to move to other

countries, and more likely to have stronger linkages to other domestic firms.

43

Middle income countries have increasingly been meeting their finance needs through

foreign investment, both portfolio investment and foreign direct investment. Portfolio

investment, of which Tanzania at present attracts virtually none (World Bank) calls for

financial institutional development, state capital controls and active state intervention in

banking systems in order to prevent instability and financial crises.

Foreign direct investment is of very small, but increasing, importance in Tanzania. In the

late 1980s and early 1990s, foreign direct investment was less than 1% GDP, while

between 1995 and 1998 it has been over 2% of GDP (World Bank). Foreign Direct

Investment increased from an average of $3m per annum between 1987 and 1992 to

$151m in 1995 and $184m in 1999 (Mbelle, 2000, p.21).

Foreign direct investment (FDI) brings the advantages of technology transfer and

financial investment from abroad with foreign owners bearing the risk on investment.

However, profits are more likely to be repatriated rather than re-invested domestically,

that the measures required to attract FDI may be very costly. FDI is attracted by resource

based factors, transport cost factors and market based factors, as well as administrative

factors such as tax rates, potential for transfer pricing and regulation. In addition factors

such as regional familiarity and cultural and language factors may influence where

multinationals locate (Kozul-Wright and Rowthorn, 1998).

Chang (1999) argues that developing countries should not pre-commit themselves to

facilitating and offering concessions to all types of foreign direct investment, but should

use their bargaining power to extract commitments from multinational companies in

terms of technology transfer, employment, exports and foreign exchange earnings. If

foreign subsidiaries set up in order to tariff jump, attempts must be made to increase the

amount of domestic value added.

44

It is important to ensure that technological transfer takes place (Wangwe, 1995a, Ch.6).

Foreign direct investment may preclude the build up of local capacity in market research,

technological development and management. This is especially the case if the local

subsidiary is one of many performing similar tasks to subsidiaries in other countries, and

higher skilled work is done by ex-pats or parent company headquarters. This has been

the case for Matsushita Electrical Manufacturing in Tanzania (Wangwe, 1995a, p.98).

However, if the local subsidiary is producing for a unique market segment or part of a

production chain, it may be more likely to develop product designs and marketing

strategies locally (Wangwe, 1995a, p.95).

Industrial policy requires an analysis of the potential for generating public, domestic and

foreign direct investment in different industries, and especially a comparison of the

incentives required to attract foreign direct investment with the financial, technological,

skill and networking benefits expected from it.

Conclusion

Historical experience has shown that an active state industrial policy is required for

manufacturing development. Structural adjustment programmes fail to address this

important area of policy, as they focus instead on the macroeconomic environment and

they cause the erosion of state capacity to implement active industrial policy.

Active industrial policy requires a developed and dynamic information base and research

capacity available to the state; a clear framework of criteria, such as those discussed in

this paper, through which targeted industries are chosen; and state support for industry

being credibly tied to productivity improvements and performance.

45

Initial and ongoing analysis of the requirements and effects of different industries in the

areas discussed above, through communication with a broad range of actors domestically

and assessment of experience internationally, and incorporating monitoring, feedback and

learning from policy experience, is necessary in order for industrial policy to be effective

and focused.

Researching, formulating, implementing and monitoring industrial policy is an important

and difficult process. The Tanzanian state requires more financial resources and

adequate numbers of skilled employees, rather than erosion and retreat from the

economy, in order to streamline its organisation and systems and implement active

industrial policy.

46

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Appendix

Downloaded directly from www.tanzania.go.tz/economyf.html

Industrial Firms in Tanzania:

Food, Beverage and Tobacco: The food manufacturing in Tanzania include manufacturing of dairy products, canning and preserving of fruits and vegetables, canning fish and similar foods, manufacture of animal and vegetable oils, grain milling baking, sugar and confectionery as well as prepared animal feeds. The beverages include the distilling of ethyl alcohol, distilling rectifying and blending of spirits; manufacture of wines, cider and beer. Also included are the production of soft drinks and carbonated waters and the bottling of natural spring and minerals waters. The tobacco subsector comprises manufacturing of cigarettes, tobacco and other tobacco production.

Textiles, Clothing, Leather and Footwear:

Activities undertaken in this category include spinning, weaving, finishing of textiles; the manufacture of made-up textile goods; knitting, manufacture of carpets, rugs, cordage, rope and twines.

For the leather and footwear activities involved include tanneries; leather finishing and manufacturing of products from leather such as luggage, handbags and purposes. The leather sub-sector was the first to be identified for privatisation. Hitherto, all the three large tanneries and two share making factories have been privatised.

Wood and Wooden Products, excluding Furniture Activities:

Accounted in the subsector include sawmills, planning and other wood mills manufacturing goods. Also included in this subsector is the manufacturing of wooden containers, cane products and wooden products.

Paper and Paper Products:

This comprises the manufacturing of pulp, paper, paperboard, fibreboards, light packaging, heavy packaging, stationery and other paper products.

Chemicals, Petroleum, Rubber and Plastics:

The chemical subsector comprises the manufacture of basic industrial chemicals, fertilizers, pesticides, plastic materials and products, medicinal and pharmaceuticals, soap, detergents, perfumes and other cosmetics, paints and other chemical products. The petroleum subsector comprises of petroleum refineries, fuel oils, lubricating oils and manufacture of asphalt materials. Rubber products produced in the country include tyres

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and tubes conveyors and fan belts, rubber mats, groves, pipes and tanks, plastic sheets, kitchenware, furniture and footwear. Production, albeit characterized by peaks and troughs, has remained approximately constant since the early nineties.

Non-metallic Mineral Products:

This includes manufacture of pottery, china and earthenware, glass and glassware products, bricks, tiles, cement, concrete, gypsum and plaster products.

Physical volume of production has been in the up swing since the early nineties and particularly towards the end of the decade following privatisation of the cement mills. Level of employment has similarly been sustained.

Basic Metal Products:

This comprises rolling mills and foundries to produce products such as slabs, bars, sheets, plates, strips, tubes, pipes and rods.

Fabricated Metals, Machinery and Equipment:

This includes manufacture of cutlery, hand tools and general hardware, furniture and fixtures, doors, metal staircases and window frames. Others are electrical motors transformers, electrical control devices and switchboard apparatus as well as radios and transport equipment, mainly bicycles and animal and auto-pulled carts.

Other Manufacturing Industries:

This covers products such as jewellery and related articles, furniture manufacture, measuring and controlling equipment and optical goods.

Production in thin group of products has persistently been in the upward trend. Employment levels have similarly been in rising.

Production in this category has exemplified a steady growth, with an average growth of over 12 percent over the last decade. For the last three years employment in the industry increased by 11,000.

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