Smart way in financing industrialisation plan
A few months ago friends (Mr Ali Mufuruki, Mr Gilman Kasiga, Rahim Mawji) and I, set out to pen down our thoughts about the nation’s industrialisation journey, as we imagine it.
These thoughts are now in form of a book, titled: Tanzania’s Industrialisation Journey 2016-2056: From an Agrarian to Modern Industrialised State in Forty Years. The book covers several topics relevant for the journey. One of the key topics discussed is that of financial resources mobilisation. In today’s article, I summarise some of the thoughts and ideas we propose on financing of industrialisation journey. I however will limit today’s piece on domestic capital formation and how foreign direct investments (FDIs) can facilitate this in the short-to-medium term period. Other proposals may be discussed in later pieces.
In the book, we propose and submit to our readers the appreciation of the fact that the process of capital formation is key to the success of the industrialisation project (which we also refer as a nation-building project). We argue that, for us to succeed, our industrialisation (and economic transformation) plan and strategy must be underpinned by an equal transformative change in our financial system and its institutions. We propose for the creation of indigenous systems of capital formation that would go hand in hand with efforts to industrialise. We see this as imperative to the process.
We have laboured the details about the necessity of public and private sectors working together in this aspect of industrialisation and its financing. We hold a view that sustainable industrialization depends so much on the availability of substantial volumes of financial resources and other forms of capital emanating from private sector, we argue that a high dependence on the capacity of the government to mobilize all the financial resources will mean unsustainable industrial development. It is on such basis that we propose a strong partnership between the government and private sector in mobilising financial resources that will spur and fast track the country’s industrial development.
Cultural change
According to recent data, Tanzania’s total gross savings as a proportion of our GDP is less than 25 per cent of GDP while our investment rate per year is about 35 per cent of GDP. We see this ratio of savings relative to GDP being far too low and far lesser even relative to other poor countries. We therefore argue for smart and thorough thought through policies, that will give the country the opportunity to enhance its national capacity to mobilize financial resources. Going by the recent global trend, we are on the view that the way out of underdevelopment lies in raising the level of our nation’s savings and capital formation.
Our development financing gap is covered by foreign money in the form of FDIs, loans and grants – which by itself isn’t bad, however, for sustainable growth, we argue, the country needs to gradually reduce this gap. This requires policy makers, the people and a whole nation to make a cultural reorientation, from a cycle of low savings and high consumption to high savings and high investment. East Asian countries have done that very well during their industrialisation journey – China reached a savings to GDP ratio of 50 per cent and used its savings to fund industrial investments.
For us, the target should be a savings/GDP ratio of at least 30 per cent per annum in the next five years. We are not too naïve as we propose this, we appreciate our limitations as a country, as a society – however if we make industrialisation (and its financing) “a nation-building project”, that requires re-orientation and sacrifices for our current and generational development, then many possibilities are open, including this. At the current GDP of about Sh100 trillion and at the anticipated compounded GDP growth rate of 7 per cent, and if we save by the rate we propose and can come up with financing tools that will mobilise such resources and channel them into productive industrial sectors of our economy, this will translate into an annual savings quantum of Sh45 trillion per annum or (30 per cent of the projected GDP by 2021) from the current level of Sh25 trillion per annum. The central bank and the Treasury can create monetary and fiscal policy tools, strategies and plans that can encourage savings and eventually create a cultural change in this area.
Attracting foreign direct investment
In the book, we propose that as the country consciously increase its capacity to save and improve its capital formation capacity, in the short-to-medium term, we should target to leverage the growing economy and the opportunity it offers to investors by bringing in capital from foreign sources of funds (grants, FDIs, diaspora investments and development finance). In 2015, Net FDI flow to Tanzania was about 2 per cent of the total FDIs to Africa – FDIs to Tanzania were mainly “resources-seeking”. We argue for the re-orientation as we target both “resources-seeking FDIs” as much as we do for the “market-seeking FDIs”. With such as strategy, the country should target at least 5 per cent of FDIs to Africa by 2020.
Our strategies should be to pursue FDIs flow into what we call super priority industrial projects i.e., garments/textiles industries, agro-processing industries, footwear, solar energy, construction and furniture, fisheries, trade in tasks/parts on electronic and assembly, etc. Upon managing to make Tanzania an attractive investment destination (by way of smart policies, conducive business environment, enhanced infrastructure, relatively good labour skills, etc.) we should achieve the objective of increasing FDIs flow into our economy.
Borrowing from the South Korean experience, once raised, foreign capital should consciously be utilised to gradually build our own capital formation capabilities. We need to match the mobilized foreign capital with a clear intent to monitor, manage and prudently utilise funds raised from external sources. That is, having managed to attract foreign funds, the aim should be to use the same for financing importation of capital goods, some raw materials and foreign technology that are to be used in the industrialization program.
There should be no squandering of foreign capital or use of the foreign money for importation of unnecessary consumable items.
This is why we argue for the country to adopt a strategy of smartly balancing the inflow of resource-seeking FDIs (extractives, oil and gas, forestry products, agri-produce, etc.) on the one hand that normally bring in large amounts of investment dollars but do not create many jobs, and markets-seeking FDIs (light manufacturing such as garments, textiles, footwear, electronics assembly, paper industries, construction materials, agri-business and agro-processing, etc.) on the other hand that initially come in smaller quantities of money, but if properly tapped, can flow in much larger quantities, can create many jobs, bring in new technologies and build the capabilities of the nation over time.
Markets-seeking FDIs must be vigorously pursued especially in countries where light manufacturing industries such as China, Malaysia, Brazil, etc (garments, textiles, leather, electronics assembly, furniture, construction materials, etc.) are looking for alternative locations following the increase in cost of labour. The Chinese light manufacturing industries are currently paying $500 per month, whereas Ethiopia and some other countries in Africa labour cost per month is $50-70 per month. Bangladesh and Vietnam such costs are at $100. Despite this, other key components of costs of industrial production that needs immediate unlocking by policy action include: unreliable, and expensive power as well as inefficient, underdeveloped, and expensive logistics.
We should take these into consideration as we position ourselves to host these industries by leveraging on our strategic geo-location, inexpensive and skilled workforce, trading blocs/pacts in which it has open market access (EAC, SADC, Agoa), competitive investment laws, high-quality infrastructure, competitive energy prices, domestic market size, and stable macroeconomics.
Mr Moremi Marwa is chief executive officer of the Dar es Salaam Stock Exchange PLC
