There is also mention of studies to be undertaken to determine feasibility of District Industrialization Initiatives. These are commendable directions if indeed investors would be sufficiently attracted to put up industries there. It follows therefore that government investments in establishing the base infrastructure and support services for the SEZs and Industrial Parks should be adequate to attract serious investors.
The ‘How’ of Execution of Industrialization Strategy
Finally, the litmus test for the success of the industrialization strategy is the ‘how’ of transformation. The Plan recognizes the imperative of prioritization, sequencing, integration and alignment of interventions which is well and good in assuring ‘what to do’ to realize implementation effectiveness. What seems to lack, however, is the ‘how’ to go about these interventions which, going by past experience, often depends on the following factors:
Reforming Mindsets of Leaders
First, the state of mindsets and behaviours of political leaders and public policy bureaucrats. This point has fundamental implications. For as Mathew Burrows notes in his book entitled ‘The Future, Declassified-Megatrends that Would Undo the World Unless We Take Action’, ‘there is growing fear that democracies and the frequent change of leadership do not lend themselves to long-term planning and execution.’ How true.
The five-year election cycles can be dysfunctional to long term planning especially where leadership mindsets carry opposing views about development priorities or even thinking and approach towards issues such as the role and place of regional integration in the national planning process. This is why it is vital that any leadership that rises to power should be required to adhere to a nationally agreed Development Vision.
Funding and the State of the Business Environment
Second, the timely availability of performance infrastructure which largely hinges on optimal availability of financial resources for funding planned activities (the Plan admits, for example, that the First Second Five Year Plan failed to reach its planned targets because of inadequacy of funding. So there lies a stark lesson as scorecard), availability of trained and skilled workers, reliable power and transport, capacity and inclination to enthuse a risk appetite in strategic investors, and, finally, the overall state of the business environment.
While the Plan cogently articulates the importance of the business environment and places due regard to its improvement, the reality is that Tanzania has consistently, in the past decade, scored poorly in global indices and rankings in this area.
Unfortunately, as I write, the business environment is at its lowest ebb and I would be amazed if the Magufuli government is not seized of this most worrisome situation.
Promoting Effective Government-Business Relations
Crucially important as part of the ‘performance infrastructure’ dynamic and often taken for granted and yet which constitutes the defining character of what ‘inclusive growth’ crucially entails is the constant State engagement with leading stakeholders in the economy. In the case of industrialization, a well-structured and working system of government-business (both state-owned and private) consultations is essential to support the Development Plan’s successful implementation.
The record of the role of the Tanzania National Business Council in providing the infrastructure for such consultations in the last decade is unfortunately poor. Evidently, this is one area which President Magufuli should urgently pay attention on and redress existing shortcomings. The benefits that can accrue to the Plan implementation effectiveness from a robust and rigorous government-business consultative process are huge. Mwalimu Nyerere was a good listener and interrogator of parastatals during his leadership days. He periodically summoned different parastatal firms to the State House for detailed discussions on their performance and challenges.
Developing a Repertoire Stock of Skills
Third, the importance for Tanzania to enhance what the Plan describes as ‘its stock of skills’ as vital enablers for the better utilization of national resources and for the optimal exploitation both of national comparative and dynamic competitive advantages by targeting technology-intensive production systems.
It is evident, in reference to the Tanzania Development Vision 2025, whose central attribute is for Tanzania to become ‘a well-educated and learning society’, that the Government may be well seized of the vital importance to develop appropriate skills that meet the needs of an evolving and more dynamic economy. It is notable, for example, that there is greater realization that for the Plan to realize its goals, broad-based qualitative education is required to promote both basic technical and professional skills that help to shape, develop and ingrain mindsets that are imbued in creativity, innovation and problem solving.
The rationale for these dimensions is simple: the production of higher value-added quality goods and services, resulting from technology-driven innovations, which foster higher economic growth, create employment and promote greater prosperity depend vitally on a wide pool of repertoire of quality skills in society.
However, the challenge is that today’s dynamic environment imposes a higher level of urgency and complexity. Political leaders, public policy bureaucrats and business executives must increasingly react to sudden shifts in the national economic environment, global and regional external shocks and to new policy imperatives.
In this regard, it is noteworthy and commendable that the Plan gives human capital development due importance which is a departure from past approaches. For example, the Planning Commission Study (June, 2014) on ‘National Skills Development to Facilitate Tanzania to Become a Strong and Competitive Economy by 2025’ not only projects the targets of skilled labour force at the professional level in all the vital sectors of the economy up to 2025 but also outlines the capacities available as at 2012/13 along with the skills deficits and occupational skills mismatches base on survey results involving different industry players.
Aligning Training to Market Demands
Hopefully, data from such a study would offer important inputs to our both the public and private Universities and the professional institutions of higher learning, such as the Institute of Finance Management, the Tanzania Institute of Bankers, Tanzania Institute of Accountancy, Mweka Wildlife College, Public Service College etc, to shape and re-shape their teaching curricula as well as their research agenda to respond to market-driven demands and relevance. Importantly, such data should also provide an objective basis for the government to determine its ‘developmental state’ intervention role in funding higher learning institutions.
Enabling public and private institutions of higher learning to align their education and training programmes with national development plans and market demands is of critical importance. A 2015 Policy Research Working Paper by the Education Global Practice Group, an associate of the World Bank, entitled, ‘Skill Use, Skill Deficits, and Firm Performance in Formal Sector Enterprises’ focused on Tanzania, aptly notes that ‘inadequacies in Tanzania’s education and training systems compromise the quality of workforce skills, giving rise to shortages, and constraining the operations and growth of formal sector firms in the country’.
In their skills survey, the Education Global Practice Group discerned, that in contrast to firms that are non-innovators and which have a primary focus on the domestic market, innovating and exporting companies ‘face greater skill demand and suffer from skill shortages that are more likely to constrain their operations in such areas as quality assurance, use of new technology, and introducing new products and services.’ While the Plan is not clear on how the government plans to build a partnership with the private sector in addressing the paucity of skills, both professional and basic, it is incumbent upon the private sector to rise up to the challenge. It must change its outlook and view training as a shared responsibility between the government and the private sector.
Exim Bank Tanzania Limited, for example, has established a good Academy in Dar es Salaam which offers training courses for the whole range of its staff. Similarly, the Tanzania Ports Authority, for decades, has had the Bandari College which offers a wide range of formal certificate and diploma courses as well as management development training programmes.
Which Distinctive Advantages Need Promotion?
Let me also point out that a key area in promoting a performance infrastructure is government provision of distinctive advantages that make an industrialization strategy successful.
Scarcity of Capital
A major challenge in Tanzania today is scarcity of domestic capital resources. Whilst the gross savings rate has improved over the last decade reaching 20.6 per cent of GDP in 2014, the highest in the EAC region, it is still very low compared to similar rates in South and East Asia where the average rates are above 30 per cent and are as high as 45 per cent in Singapore and 50 per cent in China. Tanzania needs to save more if it is to create a stronger capital base to support robust fixed capital formation.
At the same time, Tanzania has a low entrepreneurial spirit partly because of its long socialist past and partly because business start-ups and small enterprises are incapacitated by a banking system that is largely conservative and risk-averse to debt financing. It is thus crucially important that the government provides incentives to banks to bolster start-ups and small enterprises which constitute the ‘missing middle’ in the whole policy thrust of promoting industrialization.
Role of a Capital Market
Another distinctive advantage which the government needs to offer for spurring industrialization in the context of paucity of risk capital in place is proper recognition of the role of the capital market in the Tanzanian economy. A well-functioning capital market performs an important and strategic capital accumulation and allocation function that promotes economic growth and stimulates industrial development. A capital market like the Dar es Salaam Stock Exchange (DSE) provides a platform for raising low cost funds for financing medium and long term projects that help economic transformation.
Skewed understanding of Role of Capital Market in Industrialization
There are good indications that the DSE is slowly gaining depth and maturing into a viable capital market since its establishment in 1998. Today, the DSE has 17 domestic listed companies with a total market capitalization of 8.3trn/-. It also has three listed corporate bonds worth 57bn/- and government listed bonds are worth 5trn/-.
However, compared to the Kenyan Nairobi Stock Exchange (NSE), the DSE numbers are starkly inferior. NSE which was established in 1954 has 64 domestic listed companies with a total market capitalization of Tanzania shillings equivalent of 46trn/-. It has 30 listed corporate bonds worth Tanzania shillings equivalent of 1,640bn/- and its government listed bonds are worth Tanzania shillings equivalent of 22trn/-. It is not the age of the NSE that has leveraged its financial depth. It is the character of the economy and the business and regulatory environment that have contributed to the NSE’s success.
We raise these points and contrasts to underscore the importance of a strategic government role in promoting a capital market. For example, in the budget for fiscal year 2014/2015, the Kenya government imposed capital gains tax of five per cent on all listed securities. Within one month of the introduction of the tax, in January 2015, market liquidity on the NSE declined by more than 70 per cent. Many investors exited from the stock market. In September 2015 President Uhuru Kenyatta intervened with a Finance Bill and abolished the capital gains tax.
Wrong Fiscal Policy on DSE Shares Market and Empowerment
Here is my take in the context of these realities and ramifications about the fragility of the DSE’s business. It does not stand to economic logic for the Tanzania government to introduce a capital gains tax on all DSE listed securities, raise the rate of withholding tax from five to 10 per cent in respect of listed shares and to introduce withholding tax on interest income earned from listed bonds, both corporate and government whose tenor of maturity is three years and above. These tax measures remove all the key incentives which the government had earlier provided for the building of a healthy and vibrant capital market.
As it is, the market turnover velocity of shares on the DSE has seen a worrisome declining trend in the period January to May 2016 probably due to policy uncertainties. Definitely, the exchange rate risk dampens risk appetite thus making portfolio flows into the DSE, more volatile. As a result, the vibrancy of the DSE is potentially impaired.
In addition, the government surely cannot, on the one hand, express a policy desire to promote industrialization while, on the other hand, it introduces fiscal measures that suffocate one of the principal sources of domestic risk capital. At the same time and paradoxically so, the government is destroying the very strategic driver for the realization of national economic empowerment because the capital market is an important enabler of broad ownership of economic enterprises listed on the DSE. Short term revenue interests should not be allowed to frustrate long term goals envisaged in the industrialization strategy.
In sum, it would be short-sighted for the government to suddenly think that the re-capitalization of the Tanzania Investment Bank and the plan to establish an Industrial Development Bank that President Magufuli made reference to at the CTI Presidential Manufacturers’ Award event in May this year, would suffice to provide the optimal financing wherewithal to drive the planned industrialization strategy. Tanzania needs a broader and well-resourced financial intermediation system for medium and long-term financing and the DSE has the potential to play an important role in such institutional framework.
Conclusion
The Magufuli government is on the right track in pioneering and driving a robust industrialization strategy. For far too long Tanzania has lost focus on what economic factors have large impacts in economic transformation and employment creation. A too liberal imports trade policy took command in the past three decades resulting in the suffocation of the manufacturing sector. This was not as much a case of unintended consequences as one of policy failure; clearly driven by a poor appreciation of the role which the manufacturing sector can play in bolstering economic growth.
What lies before the government presently is the need to clarify the industrial policy that informs the manufacturing industrialization strategy in order to structure and put in place the right supportive fiscal and tax policies and measures along with the best institutional vehicles for enabling a coalition of ideas and collaborative efforts to take place among the government, business and labour for spearhead effective industrialization.
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