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8. Tanzania

Introduction
Firm histories
Determination of enterprise performance and efficiency
Emerging issues and the challenges ahead
Appendix
Notes
Bibliography

M.S.D. Bagachwa and AMY Mbelle

Introduction

Firms in developing countries are increasingly striving to export their products. However poor quality, high prices brought about by high production costs, and unreliable deliveries have eroded competitiveness. These firms seek to improve their competitiveness in a number of ways, which include searching for new technologies and internal reorganization. The outcome has, despite these efforts, not been very encouraging.

This study examines the technological responses of firms in Tanzania in the face of declining competitiveness. The analysis uses information from a survey of nine firms: four from the metals and engineering sector and five from the textile industry. It was found that technological adaptations and improved capabilities (both technological and human) are necessary but not sufficient conditions for improved export competitiveness. Factors such as a 'hostile' macroeconomic environment, a weak industrial base and the lack of resources, especially foreign resources, impose serious limits.

Trends and performance of export manufacturing 1966-90

Three phases of export history

The trend and general performance of Tanzanian manufactured exports are summarized in Table 8.1 (p. 205). Three main development phases can be identified over the period 1966-90. The first phase, 1966 80 was a period of gradual but continuous growth in manufacturing exports. This growth was consistent with the growth in overall manufacturing output, which grew from 4 per cent of GDP at independence (1961) to a peak of 12 per cent in 1977. The major manufactured exports at the time included textiles, cigarettes, canned food, cement, non-ferrous metals and batteries. The main markets for these products were in East Africa, and these markets were lost when the East African Community broke up in 1977.

The second phase, 1981-85, was a period of significant decline in manufactured exports. Apart from the loss of traditional markets, there were pressures on foreign exchange, necessitated by a decline in the volume of exports, drastic cuts in net foreign resource inflows and a steep decline in the net barter terms of trade. The resulting low import capacity combined with an overall decline in output to reduce significantly the supply of raw materials and intermediate inputs to industry. This led to extremely low levels of capacity utilization, which averaged 10-20 per cent. As a result of this deindustrialization' process, manufacturing activity fell to 7 per cent of GDP in 1985. Manufacturing's share of national exports also shows a decline from an annual average of 15.6 per cent during 1975 80 to 13.1 per cent during 1981-85. The degree of export orientation (measured as the percentage of manufacturing output which was exported), which had begun to decline steeply during the late 1970s, remained very low at 4.6 per cent. The overall growth rate measured in 1966 purchasing power parity dollars (PPP$) was -16.6 per cent during the 1981-85 period.

During the third phase, 1986-90 manufactured exports recovered and benefited from the Economic Recovery Programme (ERP) and the healthy state of the economy whose real annual GDP growth averaged about 4 per cent for the period. Even higher annual growth, averaging about 7 per cent, took place in the manufacturing sector. This was a reversal of the trend between 1981 and 1985, when manufacturings value added declined by 4.2 per cent per annum. In real terms the growth of manufactured exports averaged 14.1 per cent per annum for the period 1986-90 and the portion of output which was exported increased to a historical high of nearly 18 per cent.

The resurgence in export growth during the recent period can be attributed to several factors. They include a package of export incentives (e.g. adjustment in the exchange rate, a foreign exchange retention scheme, the seed capital revolving scheme, the presidential export award, export drawback scheme and export credit guarantee scheme); the 'own funds' scheme which has resulted in repatriation of capital; a fall in the real price of petroleum and related products; temporary improvement in the terms of trade due to the coffee boom in 1986; and increased donor aid as a result of adopting economic reforms (Bagachwa et. al., 1990; World Bank, 1991).

While Table 8.1 shows a significant increase in export orientation, especially after the mid-1980s, Table 8.2 (p. 206) reveals the further broadening of the export base during the same period. The increasing diversification of exports is clearly reflected in the doubling of the shares of the non-traditional exports² in total exports between 1986 and 1990. If gold is included as a non-traditional export, this share reaches about 50 per cent in 1992 (Ndulu and Semboja, 1992).

The changing policy context: towards export orientation

Until the mid-1980s, development policies and the system of production and export incentives in Tanzania (e.g. an over-valued currency, import controls, administrative allocation of foreign exchange and high protective tariffs) tended to discriminate against exports and to benefit import substituting crops and products. Tanzania has therefore relied on growth in domestic demand and import substitution as the basis for industrial development. As late as 1986 an estimated 60 per cent of Tanzania's total supply of manufactured products were produced and consumed locally, 5 per cent were exported and 35 per cent imported. This contrasts with figures at independence (1961), when 30 per cent was domestic production, 8 per cent was exported and 62 per cent was imports (Wangwe and Bagachwa, 1990).

However, the policy of import substitution was reversed with the adoption of the ERP in 1986. Under the ERP the policy emphasis on the supply side of the economy has shifted from an import substitution strategy (ISS) to an export orientation strategy (EOS) and in particular towards export diversification. The new policy advocates the shifting of resources from non-tradables to tradables by changing the structure of incentives, i.e through devaluation and exchange rate unification, changes in domestic prices and the relaxation of wage control policies. Measures which allow private importers to use their own funds to import goods and exporters to retain a portion of foreign exchange for importing goods have also contributed to the reversal.

The emphasis on export orientation is known to have a number of advantages, some of which have been demonstrated empirically. Some analysts contend that policies which do not discriminate against exports allow the realization of economies of scale' permit the exploitation of comparative advantage, foster greater capacity utilization, facilitate employment creation via market expansion and are a major source of enhanced industrial skills, productivity increases and technological improvement (Krueger, 1978; Rati, 1985; Bhaghwati, 1987).

In other quarters however, preoccupation with the EOS has been criticized for (1) failing to recognize the untenability of the static equilibrium and the pervasive market failures arising from dynamic and unpredictable learning, externalities or complementarities, (2) lacking strong empirical evidence to justify the link between export performance and productivity increases and (3) failing to recognize other key factors that influence efficiency and productivity, especially the role of capabilities in terms of skills and technological endowments (Helleiner, 1986; Weiss, 1988; Lall, 1992).

The strict separability between ISS and EOS has also been strongly questioned. As the experience of South Korea has shown, EOS can be preceded by, and can even build upon, the achievements of ISS (Jaeobsson and Alam, 1992). Moreover, the Chilean experience has demonstrated the insufficiency of market forces alone in effecting shifts from ISS to EOS (Weiss, 1988; Cooper, 1992). Furthermore, some countries pursuing ISS have managed to develop more dynamic industrial sectors than others, and in feet some of the highly export-orientated NICs have built up a major part of their competitive strength by protecting selected industries (Lall, 1992). This study is based on the premise that ISS and EOS are not necessarily competing alternatives but can actually converge and reinforce each other.

The issue of the diversification of Tanzania's export base is quite crucial. In 1991 the six traditional crops accounted for 55 per cent of the total merchandise export earnings. Prices for these primary products have generally been very unstable. The terms-of-trade index for Tanzania deteriorated from 100 in 1980 to 73 in 1989. The purchasing power of exports index also declined from 100 in 1980 to 68 in 1989 (UNCTAD, 1990). Worse still, the raw material content in modern products is declining and there are gluts in some commodities (such as coffee) which are produced in Tanzania. At the same time, sisal fibre continues to face stiff competition from polyethylene, while coffee may soon face competition from manufactured biocoffee. These trends spell disaster for Tanzania, especially when its three largest export crops (coffee, tea and sisal) are reported to have low income and price elasticities (Islam and Subramanian, 1989). Moreover, to the extent that the promotion of most traditional exports is associated with relatively limited technological dynamism, the feasibility of some of the SAP policies which are designed mainly to facilitate the expansion of traditional primary commodities is highly questionable. In the circumstances, if the restructuring process is to bring about sustainable development it should emphasize the diversification of traditional primary exports into the technologically more dynamic non-traditional crops and manufactured exports.

A framework for analysing export competitiveness

A firm as a unit of analysis

A typical African industrial firm is described as one that lacks international competitiveness, dynamism and strong linkages (Lall, 1992). These weaknesses cannot simply be blamed on the lack of imported inputs and domestic recession, nor on the lack of incentives due to distorting trade and industrial policies as the current ERP supposes. These are only a part of the problem. A major structural weakness for African industrial firms has been their failure to build up an indigenous technological capacity which is capable of acquiring technological capabilities (Lall, 1992; Wangwe, 1992). Technological capabilities (TCs) are defined in this context as a set of skills and information needed to operate a given technology and its associated organizational system efficiently (Lall, et al., 1991, p. 2).

The main objective of this study is to examine the process of building and maintaining competitiveness in export markets. Recent research on the acquisition of technological capabilities in developing countries (Katz, 1987' in Latin America; Lall, 1987, in India; Pack and Westphal, 1986, in Korea; Lall, 1992 and Wangwe, 1992, in Africa) and the earlier work on the evolutionary theories of growth by Nelson and Winter (1982) have underscored the point that any meaningful analysis of the determinants of industrial performance should initially focus at the firm level. The extrapolation of firm-level factors should then be used to develop broader explanations of industrial performance at the sectoral or national levels. The unit of analysis in this study is the exporting firm. The focus will be on how different firms strive to build up technological capabilities.

The nature of capabilities

Lall et al., (1991) have conveniently summarized and classified the various capabilities and their functions in the form of an illustrative matrix akin to Table 8.3 (p. 212). The columns explain the major technological capabilities by function. The rows indicate the degree of complexity or difficulty. The major categories of capabilities are investment, production and linkages. The acquisition of technological capabilities therefore involves a number of things such as making some adaptations to suit local conditions, i.e. gaining mastery, making minor improvements and creating new technologies or innovating through R&D. In the case of small firms some of these functions may be performed by the entrepreneur. But as the firm expands it may develop dynamism by deepening its capabilities, and most of the functions become formalized as separate units are set up to deal with each.

The firms in the sample

Nine firms were selected: four from a heterogenous set of industries and five from the textile industry. Detailed firm histories are presented in the next section. One of the firms, Northern Electrical Manufacturers Ltd (NEM), is an indigenous privately owned firm, located in Arusha town in northern Tanzania. It has been selected because it started in 1979 as a small firm with state support, producing electrical products for the domestic market with just 12 employees. It gradually acquired modest technological capabilities and grew into a moderately successful exporting firm with 120 employees by 1991. Themi Farm Implements Ltd (Them), another firm in our sample, presents a contrast to NEM. It also started, in 1981, as a small firm with state support, employing 10 persons, and is located in the same town of Arusha. It has, however, failed to acquire substantial technological capabilities and has remained a small firm, with 15 employees in 1991. Its export performance has been unimpressive.

A third firm in our sample is Afrocooling Systems Ltd. based in Dar es Salaam. The firm started as a small unit with 45 employees and with solid investment capabilities. It gradually deepened its technological capabilities and grew to become a medium-sized exporting firm with modest success. Matsushita Electric (EA) Company, a subsidiary of Matsushita Electric Industries of Japan, is a foreign-owned and relatively old firm established in 1967. The firm is fairly large and currently employs 500 workers. It assembles Japanese components to make dry cell batteries, radios, torches and fans. It has depended mainly on training to develop very limited local capabilities. The firm exports batteries to Rwanda, Burundi, Zaire and Malawi. It is exploring the possibility of manufacturing radios.

Table 8.1 Summary performance indicators for manufactured exports 1966-90

Sources: Bank of Tanzania, Economic and Operations Report, various issues;
University of Dar es Salaam (1991); URT: Economic Surveys; various issues; URT, Foreign Trade Statistics, various issues; URT, Annual Trade Reports; cited in Ndulu and Semboja, 1992.

Notes:
* Exports in PPP$ at 1966 prices computed as Exports (in Tshs)/PPPNOER, where PPPNOER is the nominal official exchange rate that would maintain purchasing power parity with the major trading partners with 1966 as a base.
PPPNOER = NOER/RER*100.
**Measured in current US$.

The firms from the textile industry were chosen to reflect two main strata: exporters and non-exporters. One firm, Tanganyika Textile Industries Ltd. a private company, started as an exporter but failed in that field. It is currently concentrating on the domestic market only. Another private firm, JV Textiles, started as an export firm and has maintained export business throughout. Three publicly owned firms, Friendship, Morogoro Canvas Mill and Morogoro Polyester Textiles, were established to supply the domestic market. Due to an interplay of factors these firms have entered the export business and have successfully maintained a hold.

THE DYNAMICS OF FIRMS' CAPABILITIES

This section focuses on the dynamics that shape capabilities at the firm level. These dynamics relate to three interrelated aspects: (1) the processes through which firms have evolved over time and the historical conditions which have shaped their particular development paths (i.e. firm histories), (2) firms' strategies and capabilities and (3) the implications of global technological developments for firms' flexible and adaptive capabilities.

Table 8.2 Export diversification in Tanzania, 1966-92

Sources: Bank of Tanzania Economic and Operation Report, various issues;

University of Dar es Salaam. (Economic Research Bureau) 1992: URT, Economic Surveys various issues: URT, Foreign Trade Statistics, various issues: URT, Annual Trade Reports. Figures up to 1990 were cited from Ndulu and Semboja, (1992); those for 1991-92 were obtained from the Bank of Tanzania (see Table 8.6).

Notes: (a) Non-traditional exports excluding minerals. (b) Non-traditional exports including minerals but excluding gold. (c) Petroleum not included in manufactured exports. (d) Petroleum included in manufactured exports.

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