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Industrialization and Global Value Chains in TanzaniaTuesday, September 02, 2014 > 11:15:19
Tanzania’s current role in GVCs is low. The service industry contributes 48% of Tanzania’s GDP. It is heavily geared towards urban centers in the domestic market and especially active in telecommunications and financial services. Agriculture contributes 27% to GDP but plays the predominant role for employment. Industry’s share in GDP is 25%, with particular contributions from light manufacturing and agro-processing. Tourism is important too, contributing some 20% of GDP, but with little value addition at the local level. Economic value addition thus occurs predominantly at the primary and secondary input levels. There is little generation of value added in GVCs, both in terms of forward and backward participation1. And despite the international financial and euro area crises, output growth and trade was remarkably stable and virtually resilient to exogenous shocks – a clear indication of seemingly little integration of the economy into GVCs.
Tanzania has experienced strong export growth and diversification away from traditional markets and products. Its total merchandise exports grew approximately five-fold over the past decade. This rapid growth has been partly fuelled by higher prices for traditional agricultural export commodities, such as coffee, tea, tobacco and fish. But the main factor has been the emergence of gold, rising from USD 383 million to over USD 2 billion. In addition, light manufacturing and agro processing exports grew from 7% of total merchandise exports to 20%. Between 2003 and 2012, exports to the EU decreased from approximately 50% to 30%. Total exports to Asia increased from 23% to almost 30%. Most importantly, exports to Tanzania’s neighboring countries in EAC and SADC rose from less than 10% to over 30% today.
While no specific data is available on trade in value added, Tanzania’s overall trade patterns do suggest important trends. On the export side, these include the emergence of raw mineral exports at the expense of traditional agricultural commodities. On the import side, the trends concern more than 25% of petroleum and oil refined products and another 25% in the form of intermediary industrial products, mostly focused in the car industry and the power sector. Another feature of Tanzania’s export performance has been diversification away from traditional markets in the EU. Trade is steadily increasing towards Asia and to some extent also regional neighbors. Overall, with only a slight shift from raw agricultural to raw mineral exports, these trends suggest that Tanzania currently continues to generate little value added in its main exports markets. In turn, the country is becoming more dependent on intermediary and final industrial products, namely from Asian markets. Tanzania is becoming one of Africa’s FDI front runners, yet the large majority is for greenfield investments in the extractive and tourism sectors, with seemingly little local value addition. The most important development potential for Tanzania to generate trade in value added therefore probably lies in strengthening Regional Value Chains with neighboring countries (i.e. Burundi, DRC, Kenya, Malawi, Mozambique, Rwanda, Uganda and Zambia). Selected case study evidence supports these assertions.
Looking forward, the biggest potential to value added trade lies in the exploitation of Tanzania’s trade linkages to its neighboring countries. Improved overall transport interconnectivity and corridor development is hence crucial for Tanzania and its landlocked neighboring countries. The port of Dar-es-Salaam is currently a major trade hub for East and Central Africa. It also opens the door for the development of Special Economic Zones and more global trade, in particular with the Asian markets, to which the country has a privileged geographic position. Due to cost advantages this includes the possibility of outsourcing lighter manufacturing businesses. Tanzania therefore needs to prioritize transport corridor infrastructure and port development to facilitate better regional trade connectivity. Moreover, institutional upgrades can improve coordination in the hinterland access regime.
Of course, the commercial exploitation of vast natural gas resources might open a unique opportunity for better integration into GVCs, namely through the proposed investments in a LNG plant, domestic energy generation and various spin-off effects, leading to employment-intensive participation of domestic businesses in the gas boom. It is estimated that the contribution of the extractive industry will increase from currently 3.5% to approximately 10% in 2025. Beside infrastructure investments, key areas include continued improvement in the overall business environment, the development of Tanzania’s skills base and the effective implementation of national development strategies.
Tanzania case study evidence on GVCs
- Agri-business has a strong potential for regional trade. For example, value chain analysis of the cross-border trade of Tanzanian onions into the Kenyan market reveals that many farmers in Arusha have specialized in regional trade (Koening et al., 2011). This is because of the input cost advantages, superior quality of Tanzanian onions and reversed cropping seasons in both countries. The market is characterized by informal entrepreneurs and on the- spot market linkages among the actors. Across the entire value chain, casual wage labor and small-scale retailers are among the poorest, while wholesale brokers and the transport sector benefits the most. Farming can be highly profitable, too, although farmers tend to have the highest risks of all part participants in the value chain. There is little support from the public sector and virtually no export regulation for onions. Although a number of quality standards and regulations exist, enforcement is rare.
- The tourism GVC has so far contributed little to local development. De Boer and Tarimo (2012) assess community-business tourism partnerships in northern Tanzania, the country’s main tourism hotspot. One of the characteristics of the nature-based tourism industry is the fact that it takes place in poor rural areas with a lot of surrounding wildlife. In principle, the tourism businesses are important, as they do not only generate additional income but also positive externalities, including enterprise development. However, the impact of global tourism on the local economy remains absent. One of the important lessons from Tanzania is that the conditions of inclusion into GVCs matter, rather than inclusion or exclusion per se. As Loconto and Simbua (2012) show, this is also evident in the fair trade GVCs for Tanzania tea.
- Changing public perception in industrialized countries about GVCs matters. In Tanzania, a prominent case is the value chain of fish from Lake Victoria. Fishing communities are better incorporated in the export-oriented Nile perch GVC rather than in fish chains that are oriented towards local and regional markets. At the same time, as Ponte (2008) and Molony (2007) show, risks and vulnerability of participation in the export-oriented GVC can be very high. For example, the award-winning European documentary Darwin’s Nightmare dramatized the supposed vastly deleterious social impacts of fishing on local communities in Tanzania. As a result, public perception in import countries on the social costs related to Tanzania fish suddenly shifted, with substantial temporary effects on trade and the local economy.