Growth Diagnostics and Competitiveness Study of the Manufacturing Sector in Tanzania

138 Pages Posted: 12 Jul 2023

See all articles by Miguel Santos

Miguel Santos

Harvard University - Harvard Kennedy School (HKS)

Bailey Klinger

Harvard University - Center for International Development (CID)

Camila Arroyo-From

Harvard University - Center for International Development (CID)

Kate Vashkinskaya

Harvard University - Center for International Development (CID)

Date Written: June 30, 2023

Abstract

The Tanzanian economy experienced a significant acceleration over two decades, growing at a compounded annual growth rate of 6% between 1998 and 2018. Within the context of such a positive performance, it is noteworthy that the manufacturing sector did not increase its share of gross domestic product (GDP), which lingered below 10% throughout the same period. The formal manufacturing sector is capital-intensive and highly productive but stagnant, while employment in. This study deploys the Growth Diagnostic framework within Tanzania’s manufacturing sector to promote a better understanding of the reasons why the country has failed to achieve its industrialization goals.

The most binding factor constraining returns to investment in manufacturing in Tanzania is the availability and quality of electricity supply. Microeconomic failures such as access to land, labor regulations, and red tape seem particularly relevant for international investors and exporters.

The structure of Tanzania’s manufacturing sector today has been shaped by decades of inward-oriented policies. We have uncovered significant evidence suggesting that import substitution (now referred to as “localization”) continues to be at the core of Tanzania’s industrial policy and shapes the incentives for the manufacturing sector today. The subscription to international agreements and trade blocks coexists with an environment that imposes a high regulatory burden on trading industries and restricts trade by means of tariff and non-tariff barriers, achieved by filing numerous exceptions to those treaties to protect individual products and entire domestic industries. Tanzania has managed to develop an inward-oriented manufacturing sector that has made a significant contribution to employment and value added, but remains uncompetitive from an export standpoint. Higher degrees of protection for sub-sectors within manufacturing are associated with higher contributions to value added but lower contributions to exports. Protective policies are biased towards energy and capital-intensive sectors and display a clear anti-export bias. Sectors that enjoy higher levels of protection and represent large shares of value added tend to be more capital intensive and display a moderate-to-high intensity in the use of energy. That, in turn, helps to explain the findings of Diao et al. (2021), who documented that the most productive firms in Tanzania are capital-intensive but do not expand employment, whereas the least productive firms within manufacturing did manage to create employment but at low levels of wages.

Keywords: manufacturing, structural transformation, growth, productivity, trade protection, Africa

JEL Classification: O14, O47

Suggested Citation

Santos, Miguel and Klinger, Bailey and Arroyo-From, Camila and Vashkinskaya, Kate, Growth Diagnostics and Competitiveness Study of the Manufacturing Sector in Tanzania (June 30, 2023). Available at SSRN: https://ssrn.com/abstract=4497905 or http://dx.doi.org/10.2139/ssrn.4497905

Miguel Santos (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Bailey Klinger

Harvard University - Center for International Development (CID) ( email )

Camila Arroyo-From

Harvard University - Center for International Development (CID) ( email )

Kate Vashkinskaya

Harvard University - Center for International Development (CID) ( email )

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