Galvanising sustainable and inclusive growth through structural transformation

The current national five-year development plan—2021/22-2025/26—prioritizes the development of industry and services in pursuit of Tanzania’s development objectives of realizing competitiveness for industrial and trade expansion, and human development. The plan has set an operational target of increasing exports to 28 percent and the share of exports in world markets to 0.5 percent.

Tanzania has since the turn of the millennium experienced rapid and sustained economic growth—at more than 6 percent and in per capita terms by more than 3.5 percent—which culminated in its reclassification from low-income to lower-middle-income country in July 2020. Interestingly, over the past three decades its growth performance has been consistently above the average growth for Africa, the middle-income developing countries, the LDCs, the developing countries, and the world.

The country’s comparative statistics postulate that while Tanzania’s economic growth has been impressive, sustaining it will require significant efforts to deal with the daunting task of developing productive capacities and transforming the structure of its economy in a rapidly changing global environment characterized by, among others rapid technological progress, the phenomenon of global value chains, and climate change. Others include constraints on the use of policy instruments to foster industrialization, trade expansion and other national development goals.

The 27th Annual Research Workshop

In response to the increasing need for accelerating the desired structural transformation of the economy, at a time of shared global opportunities and challenges, REPOA will organize in collaboration with the Bank of Tanzania, GATBSY Africa and the President’s Office - Planning and Investments (POPI) a two-day workshop.

This collaboration will provide the Bank of Tanzania, GATSBY Africa and the President’s Office - Planning and Investments an opportunity to demonstrate how they are positioned to support rapid structural transformation of the economy for inclusive, competitive and productivity-led economic growth. This will include:

While this is not the first social and economic policy workshop examining structural transformation in Tanzania, it will be the first such workshop organised by REPOA in more than five years seeking to examine one of the foundational priorities of Tanzania’s current development vision 2025 in a changing regional and global economy. It provokes and promotes policy dialogue and research on how to accelerate structural transformation of the economy and improve its outcomes in terms of inclusive, competitive and productivity-led economic growth. It also focuses on the effects of sustainably enhancing productive capacities, benefits of effective integration in regional and global value chains, and how to (re)align public-private partnerships for sustained economic transformation.

Along with the main theme of the workshop, the dialogue will be structured to include important elements that derive from structural transformation, enhancing productivity capacities, strategies for effective participation in the regional and global value chains, and improving public-private partnerships in accelerating structural transformation.

Sustainably enhancing the country’s productive capacities

The growth of productivity—the efficiency with which societies combine their people, resources, and tools—is the main driver of the development process for industrialization and trade expansion, leading to wealth accumulation and poverty reduction. Long-term incremental improvements in earnings in industry and/or agriculture—the source of employment and livelihoods for many of the population in the developing countries—can be achieved mainly by raising and sustaining industrial worker and farmer productivity.

Productivity gains within each sector of economic activity are primarily the outcome of increased dynamism within individual production units. Resource reallocation from less- to more-productive firms and activities contributes to industry-level productivity growth in any market economy—especially in low-income economies with greater economic distortions resulting from incomplete markets, coordination failures, and limited technology.

The importance of balancing a timely allocation of resources to modern and highly productive economic activities is a key structural transformation challenge. In that regard, the accumulation of skills and institutional capacities is necessary to address the fundamental challenge and sustain productivity capacities. Such a balance is key to sustaining long term growth capable of much needed positive multipliers and spill-overs that enhance both the absorptive capabilities and backward and forward linkages of transforming economic sectors.

The importance of developing productive capacities for economic growth, industrial and trade expansion is evident in the development experience of developing countries which have managed to achieve sustained industrial and trade expansion and substantial poverty reduction over the last three decades. The hallmark of their policies is that they have consciously sought to promote industrial and trade expansion and have done so through targeted policies which have aimed at developing and enabling the expansion of domestic productive capacities. This has also involved efforts to effectively promote investment, innovation, and structural transformation.

Long-term productivity growth is driven by innovation, investment in physical capital, and enhanced human capital. This requires a growth-friendly environment, with supportive institutions and macroeconomic stability. Innovation and cross-border technology transfer, and expertise in producing complex and sophisticated exports have increased in importance, along with changes in demographic factors. To rekindle productivity growth, a comprehensive approach is needed to stimulate investment in physical and human capital, and to promote a growth-friendly macroeconomic and institutional environment. The dynamic potential arises from the fact that productive resources, entrepreneurial capabilities, and production linkages are not simply given but are created and transformed over time. As this occurs, the output of an economy increases, the structure of industries changes by deepening of high value manufacturing, leading to industrial and trade expansion.

Enhancing convergence through regional and global value chains

Participation in the regional and global value chains (RVCs & GVCs) presents opportunities for bringing together producers, processors, buyers and sellers in an intertemporal framework with a view to adding value to the goods and services being exchanged as it passes from actors involved along the spectrum from conception to the final consumer in the domestic, regional, and global markets. Also involved in these chains of value-added activities are the array of technical, financial, business and other service providers along the backward and forward spectrum of the chain. GVCs promote business to business linkages that facilitate learning and market information that in turn promote the growth of real wages. To that end, modern agrarian economies are leapfrogging the manufacturing sector to directly develop their agriculture and services sectors through their participation in agriculture RVCs and GVCs.

There are several ways Tanzania can effectively leverage its participation in the RVCs and GVCs to acquire capabilities to bridge the transformation gap between it and more competitive highly productive economies, and in the process spur its own economic transformation. RVCs and GVCs facilitate sectoral and business linkages that are essential for learning and fueling demand-driven transformation.

RVCs and GVCs of this kind can provide the necessary nudge for individual industries and aggregate sectors in Tanzania to strongly pursue productivity enhancing opportunities and needed skills and technology upgrades. This will also facilitate the emergence of peripheral activities that provide wider range of employment and incomes such as transport and logistics, banking and financial services, insurance, health services, education services and several other support services.

Nonetheless, for optimal pursuit of RVCs and GVCs as an essential element of the country’s transformation strategy, diligence is needed to identify the sectors and commodities that Tanzania has positive initial endowments that would yield higher multiplier returns and productivity capacities from active investment. RVCs and GVCs promote sector and business linkages that facilitate transfers, absorption and utilization of productive capacities leading to higher productivity, improved competitiveness, skills upgrade, and employment creation through expanded industrial and market opportunities.

Pursuit of structural transformation and private sector participation

Structural transformation refers to an ongoing process of (i) increasing aggregate productivity by moving key productive resources and labour from lower- to higher productivity sectors (structural change) and (ii) raising within-sector productivity by sector-wide improvements (moving resources from low productivity activities to high productivity activities within the same sector). Increased agricultural productivity, accelerated industrialization, and building up of international competitiveness in tradable sectors are all basic objectives of transformation, which involves a step-by-step policy action focusing on real economy targets. Likewise, the shift of resources from activities with less productive capacities to sectors and activities with higher productive capacities is often thought of as moving away from ‘traditional’ sectors – such as agriculture – into more productive ‘modern’ sectors – such as industry and ‘high-end’ services.

Structural transformation has historically been a key objective of development policy in Tanzania, manifesting under various guises from modernization in the post-independent Ujamaa aspirations to its current post liberalization form as defined in the National Development Vision 2025. At the heart of the transformation agenda has been the desire to shift productive capacity growth and related economic rents from rural-based subsistence agriculture to a more diversified semi-industrialized economy characterized by increasing share of industry, services, and capital intensity.

The Tanzania National Development Vision 2025 requires the Government to support and stimulate various actors participating in economic growth, by encouraging the private sector to undertake investments in, inter alia, infrastructure and services development. Such investments can be achieved through public private partnership (PPPs) frameworks. In principle, PPPs can be an effective alternate source of financing, management, and maintenance of public sector projects.

Additionally, PPPs can enable the Government to streamline its responsibilities in providing socio-economic goods and services, and this enhances efficiency, accountability, quality of service and wide outreach, thus catalyze economic structural transformation. Despite their transformative potential, Tanzania has been slow to enact an institutional framework for PPPs with the first policy arriving in 2009, some 10 years after the launch of its development vision. The nascency of effective PPP institutions has posed numerous challenges in mobilizing private capital, creating an effective relationship between the public and private sector, and contributed to the difficulty in addressing generalized mistrust of private capital hemmed in Tanzania’s socialist past.

Investment in structural transformation has led to the supplanting of agriculture by services—mainly trade— and industry as the largest contributors to value added Gross Domestic Product (GDP). Manufacturing and trade services have grown and contributed significantly to productivity expansion and job creation in Tanzania. Further, the average labour productivity in Tanzania’s manufacturing and service sectors has outstripped that in agriculture by seven and three times more. On aggregate, there has been an increase in the share of non-agriculture employment from 25.4% in 2010 to 34.4% in 2021 and a marginal decline in the agriculture share of GDP from 27.8% in 2010 to 26.1% in 2021.

Yet, despite considerable investment, Tanzania has not made significant progress in achieving inclusive growth-enhancing structural transformation since 2011, and more broadly the last 40 years. In terms of sectoral transitioning, the economy has prematurely deindustrialized, with manufacturing’s contribution to GDP declining from 11.4 per cent in 1972 to 7.8 per cent in 2021 in favour of services (and mining). Despite its relatively high productivity, manufacturing in Tanzania is still relatively small as a share of GDP, having remained stagnant at eight per cent in the last thirty-one years since 1990.

Moreover, two-thirds of this sector is characterised by small and mostly informal firms or individuals in low productivity, low innovation, and limited growth sub-sectors, including trade services. Trade services include retail, wholesale, and the food and beverages trade which in Tanzania comprise the biggest share of the informal sector, making up fifty-five per cent of the informal business. Although these service sectors positively affect overall labour productivity by absorbing labour from agriculture in Tanzania, their inherent value addition is minimal thus limiting their savings and expansion potential.