Drivers of productive capacity for industrial and trade expansion in Tanzania
By Donald Mmari and Ahmed Ndyeshobola
Since the turn of the millennium the Tanzanian economy has grown at more than 6 percent and in per capita terms by more than 3.5 percent despite its rapid population growth. Quite positively, over the past three decades its growth performance has been consistently above the average for Africa.
When assessed at the global level, its economic growth performance has also been impressive. As per Figures 1.A, in the period 2014-19, the annual average real output growth rate for Tanzania was about 6.8 percent compared to 5.2 percent for middle-income developing countries, 4.4 percent for LDCs, 4.3 percent for developing countries, 3 percent for the world, and 2.8 percent for Africa.
Challenging prospects with the impact of COVID-19 on drivers. As per Figure 1.B, the COVID-19 pandemic has made the near-term outlook for productivity and economic growth more challenging. Weaker investment and trade, erosion of human capital, slower labour reallocation, heavier public and private debt burden, and widening inequality stands to push down the productivity growth.
The prospects for further trade integration and the expansion of global value chains have lost momentum. Sharp declines in global trade and investment, amid the pandemic, could further accelerate these trends. For many countries, though Tanzania still records a relatively higher growth, this trends into subdued activity, instability, and new pressures on governments. Yet the pandemic may also create productivity-enhancing opportunities such as lasting organizational and technological changes for business and education, reshaping global value chains toward higher diversification, and changing social norms.
SOURCES AND TRENDS OF PRODUCTIVITY GROWTH
The growth of productivity—the efficiency with which societies combine their people, resources, and tools—is the main driver of the development process for industrialisation 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.
As per Figure 2, 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.
New technologies reduce the cost and improve the efficiency and efficacy of service delivery in all social spheres. Half of referenced productivity growth is due to improvements within firms obtained by innovating, adopting new technologies, and implementing best managerial practices.
INTERNAL AND EXTERNAL DRIVERS OF PRODUCTIVITY GROWTH
Internal drivers of productivity growth include productivity-enhancing organizational features and practices that shape firms’ capabilities. These include the following:
Long-run internal 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.
External drivers. Outside forces influence productivity within and between firms. These external factors can allow each firm to improve its efficiency (the “within” effect) and stimulate more efficient firms to grow faster than others (the “between” effect). These include the following:
CONCLUSION AND POLICY RECOMMENDATION
The enhancement of productivity capacities of a country constitutes a potentiality for production, economic growth, industrial and trade expansion. Productive resources, entrepreneurial capabilities and production linkages are created and transformed over time. As this occurs sustainably, the potential output of an economy increases, thus making economic growth, industrial and trade expansion possible and sustainable.
It is recommended that this framework of analysis is adapted to inform policy analysts, private sector practitioners, and decision makers in public institutions responsible for promoting economic growth, industrial development, investments, trade expansion, and private sector development. It is the ability of these actors to address the various constraints to productivity growth that Tanzania can sustain its growth momentum, realize its development potential, and achieve significant poverty reduction.
