Tanzania economics memorandum 2012

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TANZANIA: COUNTRY ECONOMIC
MEMORANDUM 2012 –CONCEPT NOTE
Growth for jobs: Moving up the productivity
ladder through structural changes
“Growth for jobs” aims at addressing the most puzzling question for Tanzanian policymakers. While the
country has achieved one of the most impressive growth performances over the past decade, it has failed
to improve significantly the daily life of most citizens. This mixed success reflects the lack of dynamism of
the private sector that is embedded in its limited capacity to create jobs and structural changes toward
high-productivity activities. Apart from isolated successes, most firms remain uncompetitive and unable
to generate innovation. Yet, Tanzania is on the move with demographic, educational, technological
changes as main drivers. People are increasingly going to cities, they are connected by mobile phones,
and their children are all going to primary schools. To what extent are those changes for real and
capable to propel the country on a path of accelerated and sustainable growth? What can do the
Government, if any, to help this process? What have been the experiences around the world and can they
apply to Tanzania?
Main points:
 Growth has been good but did not improve significantly the life of ordinary citizens
 Failing to create jobs through a dynamic and innovative private sector is the main explanatory
factor
 Emerging signs of transformation of firms driven by technological and educations improvements.
 The signs are timid, but real, and can be encouraged by smart supportive policies and the right
business environment.
 Understanding those issues requires a multi-sector approach led by PREM but with close
collaboration with other Bank’s units including FSD on financing options for firms, DEC on
women entrepreneurs, HD on skills, SD on agriculture, and Chief Economist’s Office on global
initiatives to understand better structural changes in the region.
 And partnerships with the Government and other national stakeholders through consultative
and working groups.
I. Background/Motivation
1. To be relevant is a challenge – even more for a World Bank report. Relevance starts by selecting
the right issue and, for this reason; the PREM team went around and asked key stakeholders about their
main issues in Tanzania and what would be the World Bank’s comparative advantage. While responses
varied, they have converged rapidly around the need to understand better why rapid economic growth
has failed to produce a significant decline in poverty. This issue might appear very general, but it is at
the center of the development debate in Tanzania. It will also not disappear soon because the
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0
1000
2000
3000
4000
5000
6000
GDP per capita, PPP (constant 2005 )
Figure 2: Income per capita
Sub-Saharan Africa Tanzania
Uganda East Asia & Pacific
authorities will have to decide where to invest the expected fiscal revenues from gas exploitation when
those will materialize in about ten years. Otherwise, international experience has shown that
commodity-driven growth will raise inequalities.
2. How can a country double its GDP and fail to report a decline in its poverty level? Unfortunately
Tanzania managed to achieve this weak performance over the past decade. It contradicts the experience
in most countries around the world, including in Uganda where equivalent GDP growth led to a decline
in poverty by half. The lack of relationship between GDP growth and poverty is even more puzzling in
Tanzania given the little fluctuations in the economic growth rate observed during the past decade.1
While data are questionable, they nevertheless suggest that the rapid expansion of the economy has
been unequally distributed among regions, sectors, and households.
Tanzania has been one of the fastest growing countries in the world but income per capita
remained lower than the average in the Sub-Saharan Africa and the gap with East Asia has
multiplied by four…..
Source: World Development Indicators, 2012
3. The quasi absence of link between GDP growth and poverty levels has retained the attention of the
Tanzanian authorities since shared growth has become one of the main objectives of their recent
national strategies. Shared growth is necessary from a political perspective to maintain social
cohesion. It is also an element of economic growth because reducing the level of poverty contributes to
increase domestic aggregate demand as well as opportunities for investments in human and physical
capital. Each household moving out of poverty will spend more and is more likely to put its children in
school or to run a new business with success.2Those relationships have been well understood by
policymakers in the country.
4. The general consensus is that the weak link between GDP growth and living conditions is due to
uncontrolled demographics and the lack of diversity in the sources of growth. More people –around 1
1 For a summary of the relationship between economic instability and welfare, see N. Laoyza et al., Macroeconomic
volatility and welfare in Developing countries: an introduction”, World Bank Economic Review, vol. 21, n.3, 2007.
22 see H. Lopez and L. Serven, Too Poor to grow, Banque mondiale 2005.
4.2
7.3
4.8
-4
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 1: GDP growth
World Tanzania
Sub-Saharan Africa
April 19, 2012 DRAFT
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million per year—have to share the national GDP over time. When the population growth rate is
factored into the equation, the rate of economic expansion is less impressive (still high) at
approximately 4 % per year. Tanzania has one of the youngest and most rapidly growing populations in
the world. With a total fertility rate (TFR) of 5.4 according to the 2010 Demographic and Health Survey ,
44.7 % of Tanzania’s population is younger than 15, slightly above Sub-Saharan Africa’s average of 43.2
% according to the UN data. Looking forward, Tanzania’s population is forecast to grow fast over the
next forty years even if fertility declines, at least as long as the life expectancy continue to increase.3
5. The second explanation is that GDP growth has been fueled by little labor intensive sectors,
preventing the creation of jobs. Fiscal expansion has been one of the key factors behind the recent
economic growth. The expansion of the public sector has not contributed to provide more jobs and
income since public employment represents only 5 % of the active population. The contribution of the
public sector to living conditions was expected to come from improved provision of social services and
infrastructures. Here again, in spite of progress, Tanzania continues to lag behind most of its neighbors.
There are still today 9 times less paved roads per km2 in Tanzania than in Uganda, 10 times less Kwh per
habitant than in Mozambique or 40-% less bed hospital (per capita) than in Burkina Faso (Table 1). The
challenge to get more from public spending is at the center of the PER programmatic series developed
by the World Bank and the Government, and is therefore not discussed in the rest of this concept note.
In spite of progress in infrastructure and social service delivery –still a long road to go for
Tanzania to achieve regional standards
Table 1: (most recent data available)
Pays Paved Roads per
1000 km2
KWH per
habitant
Number of room
in primary schools
per 1000 students
Number of hospital
bedrooms per 1000
habitants
Tanzania 7.7 67.9 19.2 0.89
Uganda 82.6 38.9 20.0 0.92
Mozambique 7.2 725.7 15.6 0.87
Burkina Faso 14.1 42.7 20.4 1.42
Tunisia 81.5 1248.5 58.8 1.70
Mauritius 999.0 1855.2 45.5 3.07
South Africa 60.5 6000.3 32.3 Nd
Source : World Bank et http://www.nationmaster.com
6. Arguably, the State's growth has not been accompanied by an unleashing of private sector
activities that is necessary to create jobs and increase revenues on a permanent basis. Private
investment has stalled at 10-12 % of GDP in the early 2000s, and between 14-18 % over the last five
years. A few sectors have seen a rapid expansion such as telecommunication, mining and tourisms but
key sectors such as agriculture, agri-business and manufacturing have reported limited increases over
the past decade.
7. As a result, the overall structure of the Tanzania economy has remained relatively stable over the
past two decades even though a slight decline has been observed in the GDP share of agriculture since
2000. This decline might reflect more profound changes, such as the urbanization process, but it is far
3 For a detailed discussion, see Demography and Economic Growth in Tanzania by Anton, 2010
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from the structural shifts observed in emerging countries. For example, the share of manufacturing
tripled in Malaysia during the past three decades, in sharp contrast to the quasi-stagnation observed in
Tanzania during the same period.
Overall the structure of the economy has remained stagnant, in line with what is observed in
Sub-Saharan Africa but in sharp contrast with the successful emerging countries…
Fig. 3 : Lack of Structural Transformation since
early 1980s
Source: National Accounts
Fig. 4: Moving up the industrial ladder –
Tanzania vs. Malaysia
Source: World Bank
Note: the size of the circle represents total population
8. The lack of structural changes is embedded in the poor performance of most private firms. Overall,
the business sector in Tanzania remains highly uncompetitive.4 Productivity gains in the overall private
sector have been limited, held back by the low performance of the agricultural sector, and by the lack of
dynamism of the service and industrial sectors constrained by technological, administrative,
infrastructure, finance, and regulatory constraints. The productivity of Tanzanian manufacturing firms
was roughly 50 % and 30 % lower than those in China and in Kenya in the mid-2000s;5 while the
agricultural sector reported in 2009 a productivity (value added per worker) 4 % that of Malaysia and
also well below Kenya despite agricultural endowment advantages.6
9. Successful countries have been those that have been able to create productivity gains. This can
be achieved by using more efficient production functions, for example by using new technologies or
developing skills in a specific activity. The second channel is to shift private resources to most productive
4 African economies exhibit signs of limited structural transformation that explain why progress has remained slow
since independence. In 1965, agricultural value-added represented 22 % of SSA’s gross domestic product (GDP),
services 47 %, and industry 31 % (of which manufacturing contributed 17.5 %). In 2007, it was estimated that
agricultural value-added still contributed a healthy 15 % of GDP while services contribute to 52 % and industry 33
% (of which manufacturing represented less than 15 %).
5 Source: Investment climate assessment, Improving Enterprise Performance and Growth in Tanzania, the World
Bank, November 2004,
6 Source: Word Development Indicators
0 1 0 2 0 3 0 4 0 5 0
p e re n ta g e s h a re o f G D P
1970 1980 1990 2000 2010
Agriculture (ISIC A-B) Mining, Utilities (ISIC C-E)
Manufacturing (ISIC D) Construction (ISIC F)
Wholesale, retail trade (ISIC G-H) Transport & communication(ISIC I)
Other Activities (ISIC J-P)
Tanzania: Distribution of GDP by Sector (current prices)
April 19, 2012 DRAFT
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sectors. In that sense, the lessons of experience are clear: moving out of traditional agriculture and
other low-productivity primary activities, and expanding the “modern” sectors (including non-traditional
agriculture). Recently, D. Rodrik from Harvard University observed that “the speed with which this
structural transformation takes place is the key factor that differentiates successful countries from
unsuccessful ones.”7
10. The international
experience also reveals
that productivity gains
are unlikely to emerge
from a uniform
transformation of the
economy across the
board but rather from
structural changes in a
few sectors and in few
locations.8 Those
changes, often based on
the country’s
comparative advantages,
are leading indicators of
the process, paving the
way for broad-based
productivity gains, faster
growth and, ultimately
higher income for the
vast majority of
households.
II. Objectives of the report
1. Understand how private business adapt and behave in the current investment climate and
economic structure, with a focus on innovation
2. To analyze the economic growth and employment generation potential, and concomitant
investment opportunities in and around SMEs and clusters of activities.
3. To identify and promote signs of economic transformation in four major areas: (i) SMEs
expansion; (ii) exports; (iii) financing options for firms; and (iv) agricultural productivity.
4. Derive policy recommendations based on international practices to foster the dialogue.
5. Build capacity in Tanzania to analyze and take account emerging signs of transformation in
economic development policy and programs.
7 McMillan, M. and D. Rodrik, 2011. Globalization, Structural Change and Productivity Growth, mimeo, February.
See also, Ndulu, B. et al., 2007. The Political Economy of Economic Growth in Africa, 1960-2000, vol. 1, New York,
Cambridge University Press.
8 For historical and recent examples, see, J. Lin and C. Monga, Growth Identification and Facilitation: the role of the
State in the dynamics of structural change, Development Policy Review, 2011.
Costs of Doing Business in Tanzania
There have been a high number of studies aimed at identifying the cost of doing business
in Tanzania, including from the World Bank. They have all converged in finding that private
entrepreneurs are facing significant costs in registering and operating a business and that
little progress materialized over time.1/
The high costs of doing business in Tanzania can be captured by the following World
Bank’s indicators:
 Doing Business Index: 127th out of 183 economies (2011)
 Logistics Performance Index: 95th out of 153 economies (2010)
 Knowledge Economy Index: 122th out of 145 economies (2009)
The Government has not remained inactive, and launched the Investors’ Roadmap
Initiative in 2010 with the explicit goal to improve the country ranking in Doing Business.
The recent national strategies, MUKUTA II and the Five-Year Plan, also focus on
improving the investment climate through streamlined administrative procedures, better
infrastructure, and facilitated access to land and credit, and skill development. A series of
more specific initiative include special economic zones, private-public partnerships, and
Tanzania as a regional transit hub.
1/ For a recent summary, see World Bank, TANZANIA: Micro-Foundations of Economic Growth,
2011
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11. Growth for jobs supposes a dynamic private sector. Most employment opportunities will rise not
arise from the public sector, but from new and growing firms. In that context, it becomes important to
understand what are factors preventing the emergence of a dynamic private sector but also what is
really missing for small firms to expand and become more productive.
12. The proposed CEM will argue that the Tanzania’s private sector is on the move as the result of
technological and educational improvements. Today, half of the population is connected by phone and
almost all children are attending primary schools (Figures 5 and 6). Those improvements means that
people are better connected to information flows and more able to analyze those flows. Connectivity
has also been improved by the slow but accelerating urbanization, notably Dar es Salaam with about 3
million inhabitants, since cities are natural hubs for exchanges of goods, services, people, and ideas.9 Of
course, progress has been slowed down by remaining deficiencies in connectivity infrastructure and
educational attainments. If virtual connectivity is on the move, physical connectivity is still difficult for
many people living in remote areas. The domestic transport network is underdeveloped and there is
only one big international port, with congestion, limiting and delaying the flows of goods from and
toward Tanzania. Similarly, if an increasing number of children is attending schools, only a few of them
graduate from primary and then secondary schools.
Children are going to schools and Tanzanians speak over the phone, paving the way to
structural transformation
Source: World Development Indicators
13. Nevertheless, we believe that those dramatic improvements, far from exhaustive, have
influenced the way people live, act, work, and think. More concretely, they have contributed to the
emergence of structural transformations in firms that have and will shape the future of the Tanzanian
9 Due to high population growth density will increase fast in Tanzania, facilitating agglomeration effects. In about
40 years, population density in Tanzania will be about three times higher than in the US and about 50 % lower than
in China and Western Europe. Given Tanzania’s physical geography, in particular a rather low portion of arable
lands, this suggests that Tanzania might be able to benefit simultaneously from the demographic dividend and
advantages of high population density.
0.0
20.0
40.0
60.0
80.0
100.0
120.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
School enrollment, primary (% net)
FIg. 5: Children are attending primary
schools
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
1994 1996 1998 2000 2002 2004 2006 2008
Mobile cellular subscriptions (per 100
people)
Fig. 6: : Almost half of Tanzanians use
cellular phones
April 19, 2012 DRAFT
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economy.10 Those transformations are not yet visible in national accounts or international statistics but
they are for real.
14. Four key signs of transformation have emerged in recent years:
 The dynamism of informal firms, especially those operating in off-farm activities;
 The emergence of manufacturing exports;
 Increased options for financing;
 New pilot projects to improve the productivity of crop agriculture.
15. The first early sign of structural transformation lies in the dynamism of informal firms, especially
those operating in off-farm activities. If the agricultural sector remains the main source of jobs in the
country, the most dynamic source of employment in recent years has been household enterprises,
raising by around 13 % per year or 3 times faster than the national average (Figure 7).11 This expansion
captures the diversification of activities in rural areas (often to complement farm incomes) but also the
rapid urbanization process. Many informal firms have mushroomed in or around cities to take
advantages of the proximity of consumers and suppliers as well as infrastructure services.
Fig. 7: Average annual growth rate in employment by
type of employer, 2000-2006
Fig. 8: Manufacturing Exports
0, also to include tourism)
16. The second sign of transformation has been the emergence since 2007 of manufactures as a
major export earner (Figure 8). Partly as the response to the OECD crisis and partly thanks to the
ongoing efforts to promote regional integration, this expansion concentrated in neighboring markets;
about 55 % and 60 % of all manufacturing exports in 2009 and 2010 were sold to EAC and SADC trading
blocks. Evidence also shows that a small number of existing companies dominates the manufacturing
export market, but the range of products is becoming wider, ranging from cement to plastic items, steel
10 Major structural changes are also expected to emerge from recent gas and oil discoveries, but those will take
time to materialize while dangers in terms of corruption and misallocation of funds are already imminent when
contracts are being negotiated.
11 For a detailed discussion, see recent paper by J. Kweka and L. Fox, The Household Enterprise Sector in Tanzania:
Why It Matters and Who Cares, World Bank Policy Research Series, n. 5882, November 2011
3.2
11.2
12.9
5.0
2.1
4.0
0.0 5.0 10.0 15.0
Wage emp -public
Wage emp-private nonagriculture
Household enterprise nonagriculture
Wage emp-agriculture
Non-wage self-emp
agriculture
All economically active
(age>=15)
0
2000
4000
6000
8000
10000
12000
2007 2008 2009 2010
TSH, Billion, 2007 Traditional Exports Gold
Manufacturing Exports Tourism
April 19, 2012 DRAFT
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and iron products. Such phenomenon may reflect recent improvements in productivity and
competitiveness of Tanzanian firms, and a promising venue for job creation in not so distant future.
17. The third sign can be found in more options for firms’ financing. By 2000 most local banks had
been privatized, but the sector was still in its infancy. As recently as 2005, net credit to the private sector
was just TSh1.4trillion while it had reached TSh5.2 trillion in 2010, or 13 % of GDP. Such ratio, still very
small by regional standards, reflects a profitable sector, with increasing competition among banks. In
addition, like in many African countries, alternative forms of financing are mushrooming, including
microcredit for small firms or, on the high end of the spectrum, the regional stock market for large
enterprises.12 Lastly, for large projects in infrastructure and mining as well as manufacturing activities,
China has become an active partner with recent deals amounting to over US$5 billion.13 Those new
developments can help release the country’s financial constraints and leverage further private sector
development.
18. The fourth and last sign is found in the incipient but promising productivity improvements of
crop agriculture through new pilot projects. Doubling productivity rates seems possible in areas with
modern irrigation; while more intensive use of fertilizers is pushed by smart farming contracts, and
productivity gains have materialized for farmers
using ICT facilities (mobile phones) in the Rungwe
District.15 Improving connections between
farmers and input as well as consumer markets is
now a priority of the Southern Agricultural
Growth Corridor of Tanzania project (SAGCOT).
Many Tanzania’s farmers face untenable
transport costs and insuperable tariff and nontariff
barriers to accessing international markets,
not least of which include the continued use of
cereal export bans which make it unprofitable for
Tanzania’s low-cost food producers to sell to the
regional market.
19. The proposed CEM will focus on these four structural changes. Each of them is important, but it is
their combination that is essential for a successful transition toward economic emergence because
they help promote innovation and jobs. As illustrated in the four graphs below, the economic
transformation of East Asian countries has been highly correlated to the emergence of innovative and
fast growing SMEs, booming manufacturing exports, fast-expanding banking credit, and substantial gains
in agricultural productivity (see box on Malaysia). Those correlations suffer from the usual causality
12 For example, Precision Air (a joint venture between Tanzania and Kenya's private capital) proceeded with an
initial public offering (IPO) on the local market.
13 China's Sichuan Hongda Co. Ltd. has signed a $3 billion contract with Tanzania to mine coal and iron ore in a deal
that has been dubbed as the single-biggest investment transaction in East Africa. In parallel, China and Tanzania
have signed a $1 billion loan agreement to build a major natural gas pipeline that will lay a 532-kilometre pipeline
from Mnazi Bay and Songo Songo Island in southern Tanzania to the country's commercial capital, Dar es Salaam. .
14 The registration rate of new SMEs per 1000 habitants is about 2.5 in Malaysia in 2009, which is four times faster
than in Uganda or 3 times faster than in Kenya (Tanzania is not in the sample). Source: World Bank Group
Entrepreneurship Snapshots 2010,
15 For details, see A. G. Mwakaje, Information and Communication Technology for Rural Farmers market Access in
Tanzania, Journal of Information Technology Impact, vol. 10, n.2, 2010.
Malaysia
 Vibrant SME sector –reporting one of the
highest rate of new SMEs per year in the
developing world14,
 Successful manufacturing exports that jumped
from 20 % to over 75 % of total merchandise
exports between 1980 and 2000
 Explosion in the credit to the private sector
from 20 to 85 % of GDP between 1970 and
1985 and close to 120 % in 2009,
 Its agricultural sector that is today 6 times
more productive than the world average.
April 19, 2012 DRAFT
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problem (who is leading what?) but they make harder the argument that these four areas do not play a
crucial role in the development process of any successful country. A priori there is no reason to think
that it will be different in Tanzania.
20. The proposed focus on these four changes is also justified on the grounds of the recent economic
literature. The first lesson is that it is more cost-effective for a developing country to focus on emerging
signs, and promote them, rather than to attempt identifying future but elusive changes. Private
operators have already a good sense of existing opportunities even in a fragile and distorted
environment (Hausmann, 2010). Such focus also avoids the risk to “pick losers”, which is frequent in an
early stage of development, and costly for an economy with limited financial and human resources.
Lastly, the emerging changes are also very fragile, and the main goal for policy-makers should be to
secure them so as to produce demonstration effects that will help push forward the reform agenda.
Economic growth in East Asian countries has been highly correlated to new firms and
booming manufacturing exports…
Figure 9: SME creation Fig.10: Manufacturing exports
… supported by domestic credit and significant gains in agricultural productivity
Fig.11: Domestic Credit Fig.12: Agriculture Productivity
0
10
20
30
40
50
60
70
80
90
100
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
% of merchandise exports
Manufacturing exports
World Vietnam Tanzania
Malaysia Korea, Rep.
April 19, 2012 DRAFT
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21. The second lesson is that the above changes are highly sensitive to the policy environment in which
they are embedded. While the appropriate policy environment can encourage structural
transformations that facilitate economic growth, an inappropriate policy environment can stifle or even
destroy such transformations. The debate is not whether or not Tanzania should have an industrial
policy: rather, it should focus on how to design and govern sectoral policies in order to encourage
competition and growth. 16
22. A final word of caution might be necessary. The list of four structural changes is not exhaustive;
in particular it does not include the expected changes that will be associated to the recent discovery
of huge natural gas reserves in the South of the country. This discovery will modify the economic
structure of the Tanzanian economy but production is not anticipated to start before 7-10 years. The
proposed CEM prefers to focus on the transition. Moreover, the Government is now envisaging
receiving technical assistance on this matter from different partners, including perhaps the World Bank.
In any case, when the fiscal revenues will become available in about 10 years, the Government will have
to determine how to use those funds and our analysis should provide some useful directions.
Commodity-driven growth is not sufficient in it to ensure share growth as experienced by many
countries in the world.
III. Content of the report
23. The proposed CEM will take the form of a synthesis report, with background papers on the four
emerging changes discussed earlier. The synthesis report will not only summarize the key findings and
recommendations derived from the technical background papers, but it will also propose directions for
an agenda of reforms with the objective to stimulate the policy debate around job creation and
innovation. Such a format will make the final product more appealing to the reader, while providing
some flexibility to the approach to be followed in the technical background papers.
24. The key objective of the synthesis report will be to put the four emerging changes together,
because they are closely interconnected, and we believe that it is their combination rather than their
individual contributions that will enhance growth and job creation in the country. For example, the
expansion of SMEs might be linked to export opportunities as well as the development of the financial
sector. Similarly, manufacturing exports will be influenced by the capacity of SMEs to capitalize
productivity gains and jobs. Putting pieces together will be especially relevant for helping us to define a
concrete strategy in a few key sectors such as tourism and agri-business.
25. Each of the background paper will be associated with the emerging structural changes described
earlier and will aim at providing: (i) a description of the underlying transformation, including a
comparison with other countries; (ii) an analysis of the key factors explaining this emergence; (iii) the
existing and potential channels through which this transformation might contribute to the overall
economy; and (v) recommendations to push forward each of these structural changes and optimize their
contribution to accelerated and equitable growth both in the short and longer term.
16 For some observers, the main challenge is to identify future transformations because economic growth is based
on forward-looking innovations. There is also a raging ongoing debate on the role of the State in the process with
some arguing that it should address current market failures and other advocating that Government’s failures are
often bigger than market’s failures (see H. Pack, 2011).
April 19, 2012 DRAFT
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Background paper 1: Pushing Innovation driven SMEs
26. Objective: Helping small innovative firms to pave the way toward private sector development,
generating employment and productivity gains.
27. Issues: What kind of firms are emerging in the production structure of the economy? What do they
produce and where? Do small firms emerge as residual to the lack of other options in employment or
rather capture rational decision by entrepreneurs? Are small firms able to expand and develop/absorb
new technologies/skills? What are the main constraints faced by innovative firms? Can the Government
do something to facilitate their emergence and success?
28. The proposed chapter will use a combination of existing studies, including surveys, and new
analytical work to identify the main characteristics of existing firms. It will be a continuation of the
PREM/PSD past efforts to understand better small and informal firms as well as constraints to private
sector development in Tanzania and the Africa Region. Those efforts include the sources of job creation
as well as specific studies on the tourism sector, the competition legal and institutional framework, and
special economic zones. It will use the findings of the current initiative conducted, jointly with the SD
unit, at the municipal level in Dar es Salaam to examine what are the key actions that may help SMEs on
the grounds. It will also be connected to the series of flagship studies by the World Bank Africa region on
light manufacturing and structural changes that have retained Tanzania as a case study. Lastly, it will
expand the gender agenda in close collaboration with DEC and PRMGE.
A. The SMEs in Tanzania: Who are they? What do they do?
29. This section will set up the stage and provides a description of what SMEs are doing in Tanzania. It
will examine their main characteristics, including their location, their sector of activities, their size,
gender, and the productivity levels. As reported by Yoshino (2011), there appears to have a relatively
large productivity level between small and large firms in Tanzania, three times larger than the gap
reported in Kenya. Some international or regional comparisons will be provided.
30. This description will also help to differentiate small firms that are from homogenous. We will use
the typology recently proposed L. Fox and J. KweKa that have distinguished firms by their size and a few
other characteristics, including the degree of the formality.17
Table: Typology of Concepts Used in the Informal Non-farm Sector
Concept General Description Statistical Descriptions Comments
Non-farm
Household
Enterprise without
employees (HEs)
Individuals who operate a
business by themselves or
with the support of other
members of the household,
but without hiring any
employees except on a
casual basis.
Unincorporated; this may
mean that the finances of
the enterprise are mixed
 Own-account operator
 Self-employed in a non-farm
activity without employees
 Unpaid family workers in a
non-farm activity
Helpful to include the family
employees in the definition as
it is a household activity.
Thus, the definition of “self
employed in a non-farm
activity without employees” is
confusing unless employees is
defined to exclude relatives.
May or may not have any
registration or license; may or
17 Op. cit.
April 19, 2012 DRAFT
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with those of the
household.
may not operate full-time all
year; may or may not pay
taxes.
Non-farm
Household
Enterprise with
employees
As above, but employ at
least one person outside of
the family
 Self-employed with
employees
 Own-account operator with
employees
 Unpaid family workers
As above. No size limitation.
In this study, mostly referred
to as microenterprises.
Family workers,
non-farm
People living in the
household who work in the
business. May also include
close relatives not living in
the household.
 Unpaid family workers
The adjective “unpaid” is
often used without actually
checking on how earnings are
shared
In our analysis, family workers
are combined with other nonwage
workers, either in as
farmers on in HEs
Employee A person who is paid to do
a task for someone else in
exchange for payment.
 Employee in a wage job, paid
in cash or kind
Synonym is “job;”
“employment” includes
employee as well as employer
and anyone engaged in
nonwage economic activities,
with or without remuneration
Employer Normally, the owner of
business (incorporated or
unincorporated)
 Employer
 Business-owner
In principle, an HE owner with
employees is an employer.
But mostly, the term
employer is used for a more
established business.
Informal employee Definitions vary across
countries, but normally
workers who do not have a
contract, or whose contract
is not in accordance with
the labor regulations
and/or are not covered by
the national social
insurance system
 Employee
 Requires some information on
the nature of contract, and
benefits provided on the job
Not related to the
characteristics of the firm,
only characteristics of the job;
informal workers may work in
informal firms
Micro, small, and
medium
enterprises
(MSMEs)
Enterprises which may be
incorporated and registered
or not.
Firm (in firm surveys) Some include HEs with
employee in
microenterprises. Size
categories vary across
countries.
Informal firm Definition varies by
country. Usually a firm
which is not incorporated,
licensed, or registered. May
or may not have informal
employees.
Can include HEs if:
 data is collected in household
survey, and
 survey instrument includes an
enterprise model
Some firm surveys (e.g., ICA)
include small (micro) firms, which
may be labeled as informal
(criteria varies). These are
usually not HEs, as they have
nonfamily regular employees.
Informality of firms has to be
defined with respect to
national regulations. An
informal firm is not in
compliance with regulations,
regardless of size. But there
tends to be a correlation with
size of employment (although
not with revenues).
April 19, 2012 DRAFT
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31. This snapshot will be complemented by a more dynamic approach. In most African countries,
contrary to what is observed in developed and emerging countries, only a limited number of small firms
are able to move up and become a large employer/producer over time. We will test this hypothesis in
the Tanzanian context by examining the markets structure and its evolution for a few selected sectors,
building on our recent work on tourism and light manufacturing. A dynamic approach should also help
us to determine which sectors are most attractive for SMEs, reflecting the market preferences. Now,
such allocation can result from biased decisions since many small entrepreneurs may not have many
options except to open a small shop or trade informally on a few goods or services. For this reason, we
will try to identify a few success stories so that we can understand better the explanatory factors.
32. This double approach should help us to mapping SMEs operating in Tanzania by sectors and
regions as well as their dynamism.
B. Constraints faced by SMEs and rationale for Government’s actions
33. There has been a wide range of studies in the literature, including in Tanzania, that have identified
the list of potential constraints facing small and medium size businesses in Tanzania. The Bank has been
a key driver, notably through the recent study devoted to micro-constraints to growth and the analytical
effort to understand better the household enterprises. It appears that constraints range from heavy
administrative procedures to difficult access to skills, land and business premises as well as
infrastructure bottlenecks. The concentrated market structure seems also to represent a bottleneck in
many sectors, where a few well established large firms prevent the entry of new competitors.18 The CEM
will rely on these recent analyses.
34. Basically, the Government can act in two ways to improve the chances of success of small
innovative firms. The first way is to do less, or in other words, minimizing its interferences during the
decision process of investors and firms.19 The underlying argument is that, lack of dynamism for SMEs
is often the result of excessive administrative burdens (relative to benefits) that prevent them to
graduate from informality. While informality can be an escape to inappropriate procedures and rules, it
is a barrier to access credit and land that are generally necessary to expansion (in particular toward
foreign markets).
35. The second way is that the Government’s action can be justified in view of market failures,
especially in the areas of access to skills, credit, premises and information. Here, the key for successful
intervention is smart policy based two underlying principles: (i) use scarce public resources strategically
and (ii) provide assistance in a way that promotes competition between firms and across sectors as well
as economies of scale. In a recent paper, P. Aighon [2010) have also shown that targeted incentives will
be counter-productive if they fail to promote competition -either within the sector or across sector.
18 Overall, the level of concentration is high among Tanzanian industries, an indication of limited access to business
opportunities. For instance, in all manufacturing groups except for food products and beverages, the top 3 or top 4
firms in each group produce more than 50 % of total production. See Micro-constraints to Growth (2011).
19 This line of thinking predominates in the stand of literature associate to the Bank’s Doing Business. In that
regards, Tanzania continues to rank at the bottom of international ranking even though the Government has been
relatively active on this front by launching the Investor Roadmap initiative in 2010.
April 19, 2012 DRAFT
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C. Innovation driven SMEs and Skills Development
36. The CEM will give a special attention to the innovation process. At the outset, it is worth
underscoring that we define innovation as a broad term that encompasses virtually any new
development in firms. It can involve creating or re-engineering products or services to meet new market
demand, introducing new processes to improve productivity, developing or applying new marketing
techniques to expand sales opportunities, and incorporating new forms of management systems and
techniques to improve operational efficiency
37. Out interest in innovation is justified on two bases. First, most innovative firms are generally those
that are most likely to create jobs (Kessides et al, 2011). Pushing innovation would also help job
creation and upgrade, leading to a virtuous circle of growth. Second, innovation is a public good, and
often requires a close coordination between the public and private sector and so merits the attention of
policy makers.
38. Our research will focus on SMEs because they are the main channel to create jobs. However, such
emphasis will not prevent the report to explore recommendations for linking them better with large
enterprises. Those are also determining the competition structure of the market and play a key role in
building networks and market access because of their opportunities for economies of scale and risk
diversification.
39. Two aspects of the innovation process will be examined in great details: (i) how does a firm
adopt and adapt new technologies; and (ii) how does the innovation process diffuse in the sector or the
economy. These two aspects are connected, often sequenced, but also different in terms of public
intervention. The first aspect is linked to information access and incentives by a single firm, while the
second is about competition and market structure. We will explore best practices around the world and
examine to what extent they can be applied to the Tanzanian context. Our work will be built on the
recent policy note produced by the PREM team in 2010.20
40. One underlying theme to the innovation process is skill development. Such a process can be
successful only if the firm possesses the sufficient skill to understand and assimilate new technologies.
The complementarities between technology and human capital is for D. Acemoglu the most important
element of productivity improvement. For this reason, we will focus on skill acquisitions and
development within SMEs, looking at current programs and initiatives. This research work will built on
recent work produced by the HD sector in Tanzania.
41. Another direction to be explored in this section is to what extent SMEs tend to be organized in
clusters in Tanzania, and how such organizational form leads to efficiency gains and innovation. It has
been widely observed in OECD countries that SMEs belonging to clusters and networks are often more
competitive and innovative than those operating in isolation. Business networks take different forms
and serve different objectives. Some are structured and formal, while others are informal. Some aim at
general information-sharing, while others address more specific objectives. Some are sector (activity)
based, while others are spatially (location) based. Based on international examples, it might be worth
20 PREM, Pragmatic Innovation Agenda for Tanzania: Global Search for Home-Grown Responses to a Country’s
Challenges, October 2010.
April 19, 2012 DRAFT
Page 15 of 30
examining if firms organized along geographical, ethnic/cultural, or product characteristics requires
specific policy packages in realizing the potential agglomeration benefit.
 Spatial clusters: e.g. firms in related lines of business choose to locate and operate in close physical
proximity. Nearly all countries have examples of regional clusters.
 Ethnic/cultural clusters: The Nanyang societies amongst ethnic Chinese in Asia. These are based on
extended families and serve to bring together expertise and finance. The firms often operate in
close physical proximity, but can also be located at a distance.
 Product clusters: The use of co-operatives, in agriculture and emerging industrial firms in developing
countries to provide greater cohesion and market power to small firms. Retailers, restaurants and
specialists tend to cluster both physically and in terms of product offerings – the Hotelling ice cream
seller phenomenon (i.e. many contiguous sellers offer the same products).
42. The common theme in connection with such organizational forms seems to be that small firms can
work alone but can also form part of a larger grouping. When working together, SMEs can often
increase their focus through specialization in functions that are complementary within their networks.
They can also exercise greater influence on the policy and general business environment created by
governments and development agencies. The networks which permit a larger grouping can be
geographically dispersed, and even virtual, although physical proximity is often an important source of
innovation and competitive advantage. The benefits of being in close proximity stem, for example, from
greater access to information, the presence of concentrated and often specialized labor markets,
proximity to suppliers and customers, the increased practical opportunities for mutual gains from joint
marketing, technology sharing, mutual credit guarantee programs and various other forms of inter-firm
collaboration.
D. Women entrepreneurs
43. Lastly, this chapter also intends to examine the role played by women (and the resulting gender
biased economic opportunities) in the development of small and dynamic firms in Tanzania. Like in
most African countries, Tanzanian women account for a large fraction of small entrepreneurs especially
in the informal sector.
44. The proposed CEM will look at the gender dimension of entrepreneurship and self-employment in
Tanzania, in close collaboration with the DEC gender group. The results of the pilot project on providing
training to women entrepreneurs in Dar es Salaam will also provide useful insights on to what extent
training programs can be effectively used to promote women entrepreneurial capacity.
45. Beyond the employment impact, there are significant sectoral (activity based) and cross-sectoral
gender implications of SME development in Tanzania, and which is important in understanding the
scope for leveraging innovation. First, gender specialization and bias in certain SME activities (e.g. food
processing, garment making and hair dressing for women, and brick making, carpentry and mining for
men) is an important factor attracting entrepreneurship and skill development in those sectors.
46. Reflecting gender biased economic opportunities in Household enterprises (HEs), Figure 13 shows
for instance, that the incidence of receiving credit that is strikingly higher among women-operated (11
April 19, 2012 DRAFT
Page 16 of 30
percent versus 5 percent among male-operated) household enterprises. Arguably, this reflects the
biased focus of microfinance institutions on lending to women as they are considered trustworthy and
impactful.
Figure 13: Gender Distribution of Credit Sources among HEs and Microenterprises, 2006
Source: Calculations based on the ILFS 2006 data.
47. Secondly, such gender specialization has also explained earning differences between men and
women in the respective sectors. For instance, according to the United Nations World Tourism
Organization (UNWTO) and United Nations Global Report on Women in Tourism 2010, tourism is found
to be one of the few sectors where women outnumber men in some fields and are paid equally well. In
the hotel and restaurant sector, for example, almost 40% of employers are women and almost half of all
self-employed business people are women. Notably, out of 172 developing countries, Tanzania is in the
top ten for the participation of women in tourism.
48. Third and finally, compared to men, women have fewer advantages and face additional constraints
that limit their opportunities for jobs and earnings in the formal sector, they are concentrated more in
the informal sector. Thus, in order to succeed in leveraging the emerging signs of structural
transformation, it is imperative to ensure that “smart” policies and programs enhance full participation
of women in economic activities. For example, such policies would advocate the need for (gradually)
reviewing use of customary law relating to property, inheritance and land rights, to empower women to
realize their economic potential.
49. The CEM will aim at supporting and leveraging the remarkable progress made by Tanzania in
empowering women participation in the leadership and economy (WEFGGG, 2006). Most of the policies
and strategies in Tanzania have adequately articulated the need to empower women and addressing
gender issues affecting women participation in private sector (see for instance, TTIS 2009-2013 which
articulates an enabling environment for greater women’s participate in trade).
0 .2 .4 .6 .8 1
Other sources
Bank or financial institution
Business association, NGO, donor project Saving and credit co-operative (SACCO)
Rotating saving & credit group (UPATU)
Relative or friend
HEs
Male Female
0 .2 .4 .6 .8 1
Other sources Bank or financial institution
Business association, NGO, donor project
Saving and credit co-operative (SACCO)
Rotating saving & credit group (UPATU)
Relative or friend
Micro enterprises
Male Female
April 19, 2012 DRAFT
Page 17 of 30
Background paper 3: Encouraging exports
50. Objective: Understand the recent surge in manufacturing exports and explore new opportunities
both in terms of product and destination diversification.
51. Issues: What products and services have been exported from Tanzania in recent years? What are
the main explanatory factors of emerging manufactured exports? What are the regional and South-
South opportunities? What are the main obstacles to become an exporter? Are quality and standards
problems? What are the synergies between Tanzanian firms and global networks?
52. The main findings derived from recent analytical work, both in Tanzania and elsewhere in the Africa
region will be used for this chapter. The PREM Tanzania team has been very active over the recent years,
conducting a series of analytical work on trade issues such as export promotion, quality and standards,
regional integration, and non-tariff barriers. Concurrently, the recent literature provides insights on the
firms’ motivation to become an exporter that can be explored in Tanzania (See, for example Cadot et al.
2011). Lessons from international experiences will be brought into the picture to help us derive concrete
recommendations on what Tanzanian policymakers can do (or not do), especially in the areas of export
promotion and non-tariff barriers. This chapter will expand the current analytical effort to promote
regional integration since Tanzania can position itself as a credible transit hub for landlocked countries,
and exploit regional markets.
A. Recent evolution of exports
53. While Tanzania remains as a relatively closed economy by global standards, its exports have been
growing relatively fast over the past few years, supported by favorable terms of trade and the
emergence of new products (including gold) and exporters. The country has also been able to discover
new destinations, moving away from traditional European countries to Asian and regional markets.
These trends are depicted in Figures presented below.
Figure 14: Figure 15:
Data Source: IMF Direction of Trade
April 19, 2012 DRAFT
Page 18 of 30
Figure 16:
Data Source: UN COMTRADE
54. This chapter will consolidate and examine more in depth the above trends. It will first examine
how Tanzania’s export could reach out to additional markets, especially through regional integration.
Then, it will focus on the different challenges that can be used to diversify products and services. Finally,
it will attempt to identify the main characteristics of exporting firms and explore how those can be
transmitted to potential export in cost-effective ways. These three aspects are interconnected as the
choice of destination, the range of products and the type of firms are simultaneously determined in
practice.
B. Reaching out new markets
55. Reaching more markets with existing products: One way for exports to increase is to reach out to
more destinations. In their empirical study, Newfarmer and Brenton (2007)21have shown that successful
exporting countries are those that sell their products to a wide range of countries. By contrast, most
African countries concentrate their existing products in a few destinations. As an example, these authors
have calculated that Germany and Korea are capable to exploit 60 and over 20 % of their export
potential, while Kenya or Mozambique less than 3 %.
56. The starting point would be to use the Newfarmer-Brenton methodology of analyzing extensive
margin (as opposed to intensive margin) of exports by differentiating products and destinations so that
we can capture how much Tanzania has been capable to exploit the export potential of its existing
products. While progress took place over the past few years, notably through Asian and regional
markets, the unexploited potential might still be large.
57. Beyond this general assessment, it will be useful to look at specific products and destinations. Such
a disaggregated approach should help us to identify explanatory factors for success, including promotion
activities and dynamics within firms and across sectors as well as global networks. Significant variations
might be expected depending to the degree of connectivity between Tanzania and its partners. To put it
simply, the magnitude of trade between two countries is inversely proportional to their physical and
virtual distance as has been empirically tested by (trade) gravity models. Some products are also easy to
21 Brenton, Paul and Richard Newfarmer. 2007. “Watching More Than the Discovery Channel: Export Cycles and
Diversification in Development.” World Bank Policy Research Paper Series No. 4032.
0
500
1,000
1,500
2,000
2,500
0
100
200
300
400
500
600
700
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Exports
World (right axis) Asia EU N America SSA EAC SADC
April 19, 2012 DRAFT
Page 19 of 30
move, while others not. The lessons of the international experience also suggest that discovery is not
automatic, and may require smart cooperation between the private and public sectors as well as
interactions with purchasers and consumers in importing countries.
58. A special attention will be given to regional markets: The regional integration effort offers present
and future trade opportunities for Tanzania – bilateral trade has already increased between EAC and
SADC countries over the past few years. In that context, Tanzania need to take advantage of proximity
by lowering lower transport cost and preventing other trade obstacles at border, such as non tariff
barriers, so that it can exploit further intra-industry trade through increased specialization and scale
(Brenton, 2009).
59. Lastly, we propose to examine more closely the issues associated to the port of Dar es Salaam,
which is the main exit for traded goods in Tanzania, and use a regional hub. The inefficiency of the port
is well known, for instance it takes more than 11 days to proceed against 2 days in Singapore. Today, the
actions to be taken have been relatively well identified but it remains necessary to understand why their
implementation has been so slow. In cooperation with the Danish Embassy, a study of the political
economy of the port will be carried on so that current winners and losers can be identified. On this
basis, we will explore ways to reduce resistance to reforms.
C. Increasing product diversity with a special focus on manufactured goods
60. New export products have emerged over the past few years, especially gold and manufacturing.
Gold has become now the main foreign exchange earners in the country, exceeding tourism and
traditional crops. At the same, manufacturing exports have increased fivefold since 2005 (albeit from a
small base). This expansion is not independent from the intensification of regional trade since most of
manufacturing exports have been directed to neighboring markets. The economy theory predicts such
a development between trading partners with similar endowments and factor allocation.22
61. The recent boom in manufactured exports is especially encouraging for Tanzania. Growth in
manufactured exports by Tanzania is particularly prominent in the regional markets (EAC, SADC) as well
as other developing economies such as Asia (see Figure 15bis). Since Paul Krugman’s seminal work
about 20 years ago, export which are intensive in unskilled labor are thought to promote pro poor or
shared growth, whereas those which are skilled labor intensive are thought to generate positive
externalities for society as a whole. We want to explore to what extent the increase in manufactured
export has created spillovers –not only through direct job creation but also through indirect linkages
with suppliers and distributors.23
62. Export can bring different kind of benefits depending in the nature of products that are traded,
justifying alternative strategies for governments (Lerderman and Maloney (2003)).24 For example, jobs
are associated with labor intensive exports (textile, light manufacturing, and tourism) while vertical
linkages can emerge from agro-business exports.
22 For such argument, see J. Regolo, Export Diversification: How Much Does the Choice of the Trading Partner
Matter?, November 2011.
23 For more empirical evidence, see Hausmann, Ricardo, Jason Hwang, and Dani Rodrik. 2007. “What You Export
Matters.” Journal of Economic Growth 12(1): 1–25.
24 Lederman, Daniel & Maloney, William F., 2003. "Trade structure and growth," Policy Research Working Paper
Series 3025, The World Bank.
April 19, 2012 DRAFT
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D. Improve firms’ export capacity
63. By definition an exporting firm has to be competitive. Not only it will not be protected by domestic
policies but it will also have to perform better than competitors in other countries. For this reason, it
becomes important to identify who are exporting in Tanzania and what it takes to become an
exporter. Along those lines, we will propose a typology of exporting firms in Tanzania. What is their
size? Are the foreign or locally owned? Do they operate individually or in clusters? Do they have internal
quality standards? Are they integrated in global networks? Using the data collected from recent surveys
and exploiting firm-level tax return and customs data from the Tanzania Revenue Authority (TBC), we
should also be able to measure if exporting firms are systematically more productive than others.
64. Most of these questions have been examined extensively in the empirical literature of international
trade, including papers which use African firm data, providing useful benchmarks for our study. Close
linkage between export performance and productivity at the firm level is consistently documented in
the literature, both theoretically and empirically.25 Not all firms are equipped to exports as exploiting
foreign markets require competitive edges within and outside the production process. Within the
production process, the firm should own the appropriate skills and technologies that will ensure it to
meet standards and costs required by international consumers.26 Outside the firm, exporters should
mastered transport both at home and in host markets, and be integrated in global networks. Access to
export market information is an important factor to facilitate export participation in this regard. While
public policies can play a certain role in providing skills and technologies and market information to the
economy as quasi-public goods, they also have significant spillover effects among firms through their
clustering. Recent empirical studies show that exporters’ clustering may matter as it may provide more
presence and visibility on foreign markets, therefore augmenting the survival rate beyond the second
year after penetration (Cadot et al. 2011). This survival rate is also multiplied if the firms can penetrate
several markets simultaneously (Gamberoni and Newfarmer, 2009). The competitiveness in services as
inputs to manufacturing firms needs to be examined as well. This includes availability of more efficient
and competitive professional services as presented in the recent World Bank study on professional
services in East Africa.
Background paper 3: Financing options for firms
65. Objective: Explore how and through which channels the financial sector can help finance private
projects in both the short and longer terms.
66. Issues: What are main sources of financing for firms? What is the role of commercial banks? What
kind of projects and firms are likely to be financed by banks? To what extent microfinance institutions
25 This includes the case of export performance both in terms of intensive and extensive margins. More productive
firms export to more diversified sets of markets. See, for example, Yoshino, Yutaka. 2008. “Domestic Constraints,
Firm Characteristics, and Geographical Diversification of Firm-Level Manufacturing Exports in Africa.” World Bank
Policy Research Working Paper Series No. 4574.
26 Banque Mondiale. 2005a. Food Safety and Agricultural Health Standards, Challenges and Opportunities for
Developing Country Exports. The World Bank. Washington, D.C. Banque Mondiale. 2005b. Tanzania's Agro-Food
Trade and Emerging Sanitary and Phytosanitary Standards: Toward a Strategic Approach and Action Plan. The
World Bank. Washington, D.C.
April 19, 2012 DRAFT
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are filling the gap? Is the arrival of new players (e.g. China) bringing new alternative to project
financing?
67. This chapter will mostly rely on new material, starting by a qualitative survey from finance
providers and new analysis on the demand and supply side of domestic finance. It will nevertheless rely
on the findings of most recent FSAP {2009). It should make use of recent business surveys, including
from ICAs and World Bank Enterprise Surveys (WBES) database.
A. Times are changing: recent trends in the financial sector
68. After years of immobility the Tanzanian financial sector has seen significant changes over the past
few years. Banking credit has increased by almost 4 points of GDP since 2005, reaching about 13 % of
GDP by 2011. This ratio remains nonetheless low by regional standard but has been driven by lower
bank margins (down from 12 % in 2004 to 6 % in 2010), reflecting more intense competition.
Concurrently, the micro-finance sector has been booming and new players (mainly from East Asia) have
increasingly offered new opportunities for projects’ financing. Those developments are vectors of hope
because, in low income countries such as Tanzania, it has to be expected that labor growth is swifter
with a higher level of private credit/gross domestic product (Demirguc-Kunt and Levine, 2001; Levine,
2002). The positive effect of bank credit should be especially pronounced in industries that depend
heavily on external finance; and banking development is positively associated with more physical and
human capital investment.
69. Those changes are only a beginning and much remains to be done. Access to credit is still
problematic for many businesses as reported by recent surveys. According to the World Bank
Investment Climate Assessment (2009), about 40 % of managers of small enterprises said that access to
finance was a problem, while only about 28 % of managers of large enterprises said the same. These
recent developments offer nonetheless new opportunities for private financing and they need to be
pursued.
B. Access: Still the major issue for SMEs?
70. The objective is to examine if small-scale firms have benefited from the recent increase in the
private credit market development. For many researchers, access to finance is held up as the major
problem for SMEs because the evidence clearly shows that returns to capital are high in this segment.27
This shows that access to finance is a significant barrier, and that there is a massive profit opportunity
for those who are able to successfully finance these firms.
71. The first step will be to examine if the recent trend in credit by commercial banks has been directed
to SMEs. A recent empirical research in a large sample of developing countries has concluded that this is
unlikely to be the case (see Robert Cull and L. Colin Xu, 2011.)28 Their basic finding is that larger, capitalintensive
firms are generally the main beneficiaries of the expansion of the banking system. Such a
result is consistent with the history-based political economy view that banking systems in low-income
27 For more details, see: http://www.hks.harvard.edu/centers/cid/programs/entrepreneurial-finance-labresearch-
initiative/the-missing-middle. E.g Banerjee & Duflo (India), McKenzie & Woodruff (Mexico)
28 Job Growth and Finance Are Some Financial Institutions Better Suited to Early Stages of Development Than
Others? World Bank Research Paper Series, 5880, 2011
April 19, 2012 DRAFT
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countries serve the interests of the elite, rather than providing broad-based access to financial services.
We will test this hypothesis in the case of Tanzania.29
72. In order to understand better the behavior of banking credit, we will conduct a small survey of
finance providers and update the data collected from the most recent Investment climate survey (see
Box). In general, commercial banks seem to remain risk adverse, concentrating their activities on large
firms and a few sectors (manufacturing, transport and communication, trade, and personal loans).
73. The second step will focus on micro-institutions, both in the rural and urban contexts. Such
institutions are generally viewed as optimal during early stages of development from the new structural
perspective, where a large number of relatively small banks would service small-scale entrepreneurs
(Calomiris and Haber (2011)). True, the MFIs’ loan portfolios grew considerably in Tanzania, with a 63 %
increase during 2006-2007, but it still not clear to what extent such an extension has contributed to
business development. For some analysts, the impact of semi-formal institutions in microfinance,
especially in closing the access gap, has been constrained by excessive concentration in (i) urban areas;
(ii) on formal rather informal clients, and (iii) lack of innovation in products. Those institutions should do
more in servicing the informal sector in rural areas where most entrepreneurs do not have any other
options. Following lessons emerging from Kenya (and few other countries), local institutions should be
more active in promoting the use of mobile phones and other ICT tools. Lastly, they focus their activities
on individuals rather groups, while the patters are an effective way to hedge risks and reduce
transactions costs.
C. Non-banking sources of financing
74. For many firms operating in Tanzania, financing is an internal or family business. This is true in all
of Africa. A recent survey reveals that about half of the population has no access to any kind of finance,
29 Preliminary evidence indicate that most large banks provide banking services to large corporate which often
represent 70 % or more of their loan portfolios. In contrast, with the exception of the increase in salaried credit,
the retail segment (including small firms) remains of minor importance for large banks, including those that are
more heavily engaged in microfinance lending. Source: FSAP.
SEM Finance: A new survey
In the context of the TZ CEM (lead by PREM), we intend to conduct a diagnostic assessment of supply and demand
side for SME finance.
The methodology to analyze the supply side will consists primarily of in-depth interviews with banks and other
formal financial institutions using a specially designed questionnaire. The interviews will address four broad areas:
(i) the extent of the banks’ involvement with SMEs, (ii) drivers and obstacles to SME bank financing, (iii) the banks’
SME business models (including products and credit risk management), and (iv) the impact of existing government
policies and potential areas for government involvement. Variants of this methodology have been successfully
used in other African countries, namely Nigeria and South Africa, as well as Latin America, and South Asia.
As regards the demand side, we will compare the data collected for the latest Tanzania Investment Climate
Assessment (ICA) with new data collected through a follow-up survey to the previous enterprise survey. More
precisely, the survey will aim at re-interviewing SMEs that were surveyed for the ICA, therewith providing a panel
of firms. The new survey will use an instrument comparable to that used in the context of the ICA, but will focus on
the firms’ access to financial services and how this has changed over the last years.
April 19, 2012 DRAFT
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while only 12 % use formal credit.30 Other use informal or semi informal channels (family, friends, kiosk,
non-monetary loan) that merits further attention because they are essential to small business
development in both urban and rural areas.
75. Those informal sources of financing have traditionally played a key role in the development of
family and ethnic business where personal links predominate. Those links are essential in the absence
of strong guarantees and enforcement. It might be interesting to examine more closely how do these
financing mechanisms operate in the Tanzanian context and compare them with current practices in
countries such India.
76. This chapter will also look at the new wave of entrepreneurs that has emerged in Tanzania -many
of them coming from Asia. Those include large conglomerates interested in large projects in
infrastructure and mining. They are also small businessmen involve in trading and/or informal activities.
Interestingly, all of them offer new options for financing. These new players can finance their own
projects or establish partnerships with local businessmen or the government. They can also help secure
additional financing through their link with external foreign institutions. As an illustration,
Chinese/Indian investors have increasingly been active in infrastructure and industrial projects –bringing
funds but also leveraging financial resources from outside institutions such as Exim Banks and
infrastructure funds.
77. Unfortunately, little seems to be known about these new partners, raising suspicion. The study will
examine more closely the sectors in which they have been involved and their capacity to stimulate local
business through financing.
Background paper 4: Looking for a breakthrough in agriculture productivity
78. Objective: enhancing agricultural productivity to help the sector meet its potential and create jobs
as well as business opportunities.
79. Issues: Why has been agriculture productivity so low? What are recent initiatives on ICT and
framing contracts are telling us? Can success stories repeat at larger scale? Is success rooted in reforms
outside rather than farm gates? Is access to input and consumer markets determinant?
A. Understanding the low productivity of the agricultural sector in Tanzania
80. Agricultural productivity is vital for Tanzania’s development. First, the agricultural sector still
represents today a quarter of GDP and about ¾ of total employment (at least as defined as prime
activity). Second, in a dynamic perspective even though the GDP and employment share of agriculture
will decline, food will be needed to support the economic and demographic transformation toward nonagricultural
sectors and urban centers. Lastly, the development of the rural non-farm sector is closely
linked to the profitability of the agricultural sector: more than half of the start-up funds for non-farm
businesses came profits generated by the agricultural sector (Figure). In short, there would be no “full
employment”, food and a dynamic non-farm sector in Tanzania if the agricultural sector fails to generate
significant productivity gains in the next few years.
30 Finscope 2009, Survey for the Demand for and barriers to accessing Financial services in Tanzania.
April 19, 2012 DRAFT
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Figure 17:
81. There exist a considerable number of analyses that have sought to explain why productivity of the
agricultural sector has remained so low in Tanzania (see Binswanger, 2011). This chapter will focus on
three issues: (i) ICT use; (ii) farming contracts; and (iii) access to input and consumer markets. These
issues have already received attention, including from the World Bank, both in Tanzania and in
neighboring countries.
82. These three issues can be grouped under one theme, which is the need to provide the right
information and incentives to farmers. For growth, and structural change, to take place in the
agricultural sector, it is crucial that farmers have the right incentives to produce and commercialize. This
incentive usually comes under the form of higher incomes through higher farm-gate prices or lower
production and/or marketing costs. Contracts and access to ICT have the potential to positively impact
both the revenue and costs sides. As farmers respond to those incentives a sharp supply response is
likely to be observed. As the rural economy grows spurred by increased agricultural productivity, there
should be a move out of subsistence agriculture, along with a diversification and a deepening of the
commercialization process. Of course this process needs to be supported by adequate rural services and
a strong business environment.
B. The power of information: A connected farmer is more productive
83. ICT can play an important role by providing timely information to farmers. The lack of information
introduces asymmetric information between the farmers and the traders’ relationship. The latter who is
usually better informed can then extract an informational rent from the farmer by offering lower prices.
Asymmetric information however has not only distributional implications it also has efficiency costs.
Indeed as traders try to extract as much rent as they can from farmers the latter are likely to reduce
their production and/or allocate more to own consumption rather than trading. In a recent paper,
Svensson and Yanagizawa (2009), show that in Uganda maize growers who owned a radio and lived in a
district with access to an active market information system received an average 15% premium on farm-
0 20 40 60 80 100
Kilimanjaro Morogoro Mtwara Mbeya Tabora Kigoma Kagera
Source: Author's Caluculations using Tanzania's Rural Investment Climate Survey 2005
Non-farm enterprises are created with agricultural profits
Ag. Profits Sav. Non Ag Family Other
April 19, 2012 DRAFT
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gate prices. Although the paper did not investigate the impact of MIS on production decision, there is
ample evidence that such a price difference will translate into higher production through better input
use and higher productivity.
84. Tanzania is on the verge of implementing a Market Information System of its own and it is
important to support GoT on this important endeavor.
C. Right incentives for farmers: contract farming
85. Contract farming can provide a powerful tool to boost agricultural productivity and kick start the
structural transformation process. Through negotiated contracts famers can have access to technology,
inputs, credit, training, extension advice and most importantly markets. In Tanzania contract farming is
still a nascent phenomenon and thus has great potential. Only 3.7% of the farmers in Tanzania had
entered into a contractual arrangement with a buyer prior to production. As of 2007, Tobacco farmers
were the most likely to be in a contractual relationship with 42% of them being contracted by a firm.
Table 2: Use of contract farming in the agricultural sector
# Farmers % Contract/ Outgrower % Credit % Irrigation
Tobacco 74,791 42.1% 52.2% 7.8%
Tea 17,933 28.8% 5.5% 7.5%
Sugar Cane 64,361 9.2% 4.4% 19.3%
Coffee 482,094 7.2% 2.1% 8.0%
Cashew 314,486 1.0% 1.0% 1.9%
Banana 943,677 4.6% 2.0% 8.2%
Paddy 1,145,098 3.4% 3.1% 10.3%
Cotton 403,475 8.2% 3.3% 3.3%
Rural Mainland 5,763,902 3.7% 2.4% 5.8%
86. Contracted farmers were indeed more likely to use chemical fertilizers, have credit, access to
irrigation. They also more likely to sell their crops and commercialized a higher proportion of their
agricultural production. In terms of household welfare, contracted farmers also are more likely to have
three meals a day and therefore less likely to report that they had problems feeding their families.
Table 3: A comparison of farmers with and without contracts
Use
Credit
Access
Extension
Access to
Irrigation
% of crop
Commercialized
% Quantity
Commercialized
Used Chemical
Fertilizers
Had 3
meals a
day
No
Contract
1.8%
65.0%
5.6% 57.6% 37.1% 11.7%
45.1%
Has
Contract
15.6%
89.7%
10.2% 63.1% 44.3% 31.4%
62.1%
Total 2.4% 65.9% 5.8% 57.8% 37.4% 12.4% 45.4%
Source: Author’s Calculations using (Unofficial) Ag. Census 2007-08
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87. Tanzania’s tobacco sector is a recent success story in the agricultural sector. This main engine of
this success came through the introduction of contract farming in the sector. In recent years, tobacco
has become the largest agricultural export crop in Tanzania and an important source of income for the
roughly 70,000 farmers, many of them smallholders, which grow it. Following the successful
privatization of the tobacco industry in the mid-1990s, tobacco yields more than doubled and the share
of crop graded top quality rose to more than 70 %. With increased yields and improved quality, real
producer prices also increased which led to a sevenfold increase in export earnings, from about $20
million per year when the industry was still under public sector control to more than $143 million since
privatization.
Figures 18 and 19:
88. The government divested control of tobacco processing and marketing in 1997 to two
multinational companies, Dimon and Tanzania Leaf Tobacco Company Limited (TLTC). Under the
privatization agreement, three-year contracts between tobacco growers (through Primary Societies) and
the two companies were negotiated in the Tanzania Tobacco Council, an industry organization that
provides not only for a forum for price negotiations and conflict resolution, but also graders for tobacco
and record keeping that permitted traceability of production, with oversight from the Tanzania Tobacco
Board (TTB).
89. Contract farming, however, has its drawbacks as well. Indeed, if not well designed or in case there
exists cartelization in the market (monopsony or duopsony) farmers may end up with a bad deal and the
whole mechanism may collapse. Contracting firms are at risk as well. They are especially vulnerable to
side-selling whereby the contracted farmer sells her output to a third party buyer who offers a slightly
higher price but did not provide any service to the farmer. The default risk in repaying the credit
extended or inputs provided by the contracting firm is also another major risk faced by the buyers.
90. Whether the contract farming experience in tobacco be replicating for other cash and food crops
remains to be seen. A number of contract farming initiatives has started in Tanzania as in the cotton
sector where GoT has recently decided to go to scale with contract farming in the sector. Other sectors
might benefit from such schemes but because contract farming is a risky business it is necessary to
understand for the different types of crops under which condition can such an initiative lead to higher
incomes for farmers, higher productivity, and put agriculture on the path to transformation.
D. Connectivity to markets
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91. Only a small proportion of agricultural production is commercialized. The main reason is that
farmer are isolated from both input and consumer markets. Isolation starts by poor transport
infrastructure that prevents the movement of inputs and outputs. The standard farmer cultivating maize
in Tanzania will pay 2.3 and 1.4 times more than its competitor in Uganda and Kenya (see Table). The
harbor of Dar es Salaam is also largely less efficient than the one in Kenya (Mombasa) our Mozambique
(Maputo). It is also aggravated by ineffective value chains, which explain why farmers do only receive XX
% of the final price of their products when they are sold to consumers. As a result producers do not
react to price incentives and not seek to improve their productivity.
Table 4: High Transport Costs for Farmers in Tanzania: the example of the maize market
Average
distance, km
Transport Prices,
US$ ton per km
Total
Transport
costs
Tanzania
Farm gate to first primary 16 0.4 6.4
Primary to secondary market 100 0.27 27
Secondary to wholesaler 345 0.12 41.4
Kenya
Farm gate to first primary 6 0.3 1.8
Primary to secondary market 67 0.3 20.1
Secondary to wholesaler 300 0.11 33
Uganda
Farm gate to first primary 3 1.5 4.5
Primary to secondary market 50 0.33 16.5
Secondary to wholesaler 80 0.15 12
Source: Tanzania Growth Diagnostic, partnership for Growth, 2011
92. Two promising initiatives are currently implemented to address the relative isolation of Tanzanian
farmers. The first one is the Sagcot project that has two related main objectives: (i) create a cluster
between farms, processing companies and exporters; and (ii) develop a corridor that will reduce
transport costs. The CEM team will collaborate with the Bank’s team involves in the preparation of this
project.
93. The second initiative is regional integration. Reducing barriers to trade could encourage the sale of
African-grown food within Africa itself, a practice that could benefit some of the world’s poorest
populations. If trade costs were lower, Tanzanian farmers would get higher returns for their produce
without necessarily inflating consumer prices. With access to a bigger market, farmers could grow more
food in some countries, which could help mitigate shortages in others. Increased regional trade could
stabilize prices and boost food security.
IV. Linkages with Bank strategy and activities
94. The proposed CEM will contribute to the World Bank program in at least three ways. First, it is fully
aligned with the CAS that focuses on private sector development, job creation and shared growth.
Second, it will support the regional strategy that gives much attention to the same above themes.
April 19, 2012 DRAFT
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Lastly, it will feed the ongoing research agenda promulgated by the Chief Economist on structural
transformation in the developing world, including in Africa. For all these reasons, it will be a cross
sectoral effort, led by PREM, but with close interactions with other units in the country team, with DEC,
and the Chief Economist Office.
95. CAS alignment and building up on recent initiatives at the country level. The CEM provides a
platform and an opportunity to follow up on recent and ongoing analytical studies carried on by the
Bank, at the country, regional and global levels aiming at understanding the sources of growth and
obstacles in the country. It will follow the steps of the CEM (2007) and of the recent report on microconstraints
to growth (2011). It will build on the series of background studies in trade carried on by the
Country Team and funded by the recent Trade TF, including on household enterprises, regional trade,
and transit hub. It will also support the early findings of Doing Business and the Investment Climate
Assessment that have confirmed the series of obstacles face by private businesses in the country. The
existing deficiencies of skills have retained the attention of recent HD analytical works, notably on
secondary education and vocational training, which will be used as a platform for the proposed CEM.
The recent FSAP (2009) and new initiatives to examine more closely financing providers in the country,
including newcomers and informal ones, will be used in the preparation of the CEM. Lastly, the CEM will
build on recent analytical and operational work produced by the country team, including around
SAGCOT and farming contracts.
96. Africa regional Strategy. Jobs and vulnerabilities are two pillars of the Bank’s regional strategy. The
underlying themes of the proposed CEM are job creation and innovation –two catalysts to promote
shared growth and reduce people vulnerabilities. The CEM is further aligned with a number of regional
flagship initiatives, including Africa competitiveness; inter regional trade, and youth employment.
97. Chief Economist Initiatives. It will complement other analytical work launched by his office,
including the recent studies on light manufacturing in East Africa and on structural changes in Tanzania
and Mozambique using the Growth Identification and Facilitation Framework.
98. The CEM will be multidimensional and involve a number of interactions within the WBG and
academic world:
 The first type of interaction will be at the level of the country team as different units will be involved
in the preparation of the CEM. While PREM will play the leading role, the FSD, HD, and SD units will
provide inputs onto the analysis. A close collaboration has been agreed with the FSD unit that will
take the lead on the chapter devoted to financing options, while contributing to the analysis on skills
and small business development.
 The second type of interaction will be at the regional and corporate levels by collaborating closely
with the DEC gender groups and key individuals that will act as peer reviewers (see last section).
The team has been intensively interacting with Louise Fox (youth employment), Paul Brenton
(defragmenting trade in Africa), Celestin Monga (Growth Identification Approach), T. Hihn (Light
manufacturing), and William Mahoney.
 The third type of interaction will be with leading academics, including John Page (former Chief
Economist for Africa, and currently head of the International Growth Center that is established in
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Tanzania) and local economist such as the head of the well-known think thank REPOA, Professor
Wangue.
V. Coordination with Government and other stakeholders
99. The proposed focus of the CEM meets three criteria: (i) it corresponds to the demand from top
policymakers; (ii) it is aligned with the country's strategic priorities, and (iii) the Bank will bring a value
added through a multi-task and experienced team.
100. The issues to be covered in the proposed CEM are at the heart of the Government’s strategies.
The private sector is viewed as the engine of growth, notably through the improvement of the general
business climate and the development of activities around the country’s comparative advantages in
mining and tourism. Equal priority has been given to poverty alleviation, notably through a more
equitable distribution of the fruits of economic growth and the reduction of inequalities across regions.
101. To establish a fully participatory process with the Government and stakeholders in the country, the
Bank will work closely with a technical inter-ministerial team that will be composed of the Permanent
Secretary of the Ministry of Finance, the Governor of the Central Bank, and the Executive Director of
POPC. This group will be involved in the design of this concept note to ensure ownership, visibility, and
joint accountability since the beginning of the process. This working group will interact with the Bank’s
team on a regular basis during the preparation of the report to discuss and solve together technical and
analytical issues.
102. Concurrently, a consultative group composed of diverse stakeholders (private sector, donors, and
civil society) will be invited by the authorities to participate to regular meetings during the preparation
of the CEM. Some think thank are expected to be involved such as REPOA, PED (poverty eradication
department). Other agencies will be invited such as SIDO, COSTECH (commission for Science and
Technology), VIBINDO, Ministry of Industry and Trade's SME department. On the DPs side, Finland and
DANIDA are key partners. From the private sector side, we will link with the CEO Round Table and other
associations. This group will complement the working group, composed exclusively of Government’s
experts, and will be key in providing feedback and disseminating the findings to a larger but concerned
audience, reinforcing partnerships and alliances and getting on board policymakers.
103. These two groups should help create a two dimensional process during the preparation of the
Country Economic Memorandum: (i) it will establish a channel from top to bottom with the inclusion of
the Permanent Secretary of the Minister of Finance and/or the Governor of the Central Bank; and (ii) it
will stimulate an ownership from bottom to top with the active participation of local experts and
stakeholders.
VI. Communication and dissemination strategies
104. Efficient communication starts at the design of the process and needs to be continued through
preparation and intensified at time of key finding dissemination. The two groups mentioned above
should help to build ownership for the report and prepare for its dissemination. If major stakeholders
are implied in the process since its beginning, they are more likely to be involved and endorsed key
April 19, 2012 DRAFT
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findings and recommendations. Those groups will be involves in the preparation of the four analytical
background papers.
105. To be effective, the consultation process requires being time-bound and demonstrating visible
progress over time. Agreement should be reached on a precise calendar through which steps will be e
defined and responsibilities assigned for the Bank and Government teams. The dialogue and interactions
will be promoted through continuous exchanges of drafts and incorporations of comments.
106. Finally, the final dissemination of the CEM is expected to be an inclusive exercise involving media,
civil society, private sector and the Government. The team intends to use a combination of various tolls,
including the writing report, open-ended articles for press, blogs, and general as well as targeted
presentations.
Calendar:
The proposed timetable for the production of the CEM in FY12/13 is as follows:
Outputs Timetable
1. Concept Note Review Meeting March 2012
2. CEM missions March-November 2012
3. CEM Report Decision Meeting December 2012
4. Consultations with the client January-February 2013
5. Final Delivery February 2013


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