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Supporting the preparation of Tanzania’s second Five-Year Development Plan

The Government of Tanzania, through the Planning Commission in the Ministry of Finance and Planning (MOFP), launched the second Five-Year Development Plan (FYDP II) (2016/17-2021/22) in June 2016, focusing on the theme Nurturing Industrialisation for Economic Transformation and Human Development.

This study informed the preparation of FYDP II. It takes stock of Tanzania’s industrialisation and economic transformation record, policies and strategies, identifies activities for nurturing a semi-industrialised economy, introduces a range of measurable targets that could be considered for the next FYDP, presents a resource mobilisation framework and considers new ways to make industrialisation and economic transformation a reality.

The summary paper argues that Tanzania needs a radically different approach in the coming five years in order to seize the opportunities for industrialisation in a rapidly evolving environment and concludes that there are some early signs of structural transformation in Tanzania. The country needs to build on these by addressing generally agreed policy options, but in a different way compared to the past. It can best do this in practical terms by considering a number of collaborative projects that would illustrate how it can nudge the economy further onto a more transformational path in the following areas: infrastructure development, human capital development, tax policy reform, investment climate reform and practical industrial policy. But this requires learning and adaptive development throughout the duration of the plan – a new approach that is appropriate given the new challenges.

Industrialisation for economic transformation and human development

Tanzania has grown rapidly, at a rate of around 7% over the past decade, but it needs to overcome a range of economic and political constraints and engage in different ways of working if it is to industrialise more fully, transform the economy, create more good-quality jobs, reduce poverty faster, foster human development and improve resilience against shocks. Industrialisation has been one of the priorities in implementing Tanzania’s Vision 2025, but the share of manufacturing in gross domestic product (GDP) is falling and currently below 7%. The Government of Tanzania, through the Planning Commission in the Ministry of Finance and Planning (MOFP), has begun the process of preparing the second Five-Year Development Plan (FYDP II) (2016/17-2021/22) focusing on the theme Nurturing Industrialisation for Economic Transformation and Human Development.

This study informs the preparation of FYDP II. It takes stock of Tanzania’s industrialisation and economic transformation record, policies and strategies, identifies activities for nurturing a semi-industrialised economy, introduces a range of measurable targets that could be considered for the next FYDP, presents a resource mobilisation framework and considers new ways to make industrialisation and economic transformation a reality. We argue that Tanzania needs a radically different approach in the coming five years in order to seize the opportunities for industrialisation in a rapidly evolving environment.

Tanzania has long had a broad vision of becoming a diversified semi-industrialised economy with a substantial industrial sector. It has developed three five-year plans to guide this, with the first coming to an end this year and the second, aiming at nurturing an industrial economy for economic transformation and human development, being formulated with a view to starting later this year. A number of strategies have supported the implementation of these plans. These policy documents have highlighted desirable aspects, targets and factors behind industrialisation and economic transformation. Crucially, this paper argues it is essential to guide this process by tackling three questions:

What should be the overall objective for the next FYDP: Undertake an economic transformation diagnostic which describes transformation so far, examines why this has happened and identifies appropriate sectors and targets for future economic transformation.

What needs to be done to achieve the FYDP II: Formulate policies and a resource mobilisation strategy that remove constraints towards further economic transformation.

How to make it happen: Introduce new ways of working to implement, monitor, learn lessons and adapt the FYDP II.

The issues facing FYDP II are at some level similar, but at another level very different, from those facing its predecessor. Looking backwards, this plan can learn lessons from the implementation of the first FYDP, asking why some targets have been met but not others. The new plan needs to continue with unfinished business and tackle the economic, political and institutional constraints that have emerged. However, looking forward, this plan faces a new international environment, with rapidly growing African markets and rising Asian wages, which offer opportunities for Africa’s industrialisation. The discovery of offshore gas deposits, which, if commercially viable, could boost government revenue by the equivalent of 3% of nongas GDP and bring in up to $2 billion in export revenue (while also providing a source of fuel for the supply of electricity and cheaper energy), as well as other natural resources, provides further opportunities for industrialisation, although this also presents risks. Further, this plan relies more on the private sector to undertake much of the activity, with the government facilitating industrialisation rather than getting in the way. Domestic (public and private) financial resources are increasing in relative terms compared with international sources. A new government came to power at the end of 2015. It immediately began with a range of reforms. It should also respond to the challenges above and implement a new vision for economic transformation. It cannot afford to stand aloof and risk further deindustrialisation.
Introduction and approach to the study

The second Five Year Development Plan (FYDP II) for Tanzania is set for implementation in an international environment – characterised by rapidly growing African markets and rising Asian wages – that offers exciting opportunities for African industrialisation. Rebalancing in China, strong regional growth, and the potential for offshoring manufacturing jobs away from China, all provide opportunities for African countries to gain manufacturing market share, and countries such as Ethiopia have been proactive in looking to seize the opportunity. The approach adopted in FYDP II towards economic transformation and human development in Tanzania is likely to play an important role in determining whether or not the country is able to successfully seize the opportunities for industrialisation on offer in the rapidly evolving domestic and international environment.

The MOFP requested analytical support from the Overseas Development Institute (ODI) through its Supporting Economic Transformation (SET) Programme to inform the preparation of FYDP II, specifically in the following areas:
  1. Harvest available statistics to take stock of Tanzania’s industrialisation record, policies and strategies and subsequently discern niches and pre-requisites for nurturing and leap-frogging to a semi-industrialised economy. This involves prioritisation and sequencing of particular industries and subsectors (underpinned by sound economic analysis);
  2. Identify clear measurable targets for the next five-year plan by bench-marking with other middle-income countries (MICs);
  3. Identify substantive sources for resource mobilisation (domestic and foreign, public and private) and propose a strategy to tap such resources so as to ensure successful implementation of FYDP II; and
  4. Undertake a more in-depth look at the emerging natural gas sub-sector and its linkages with key sectors of the Tanzanian economy and propose key milestones to hasten the development of natural gas-based industries.
The approach by SET to undertake these tasks follows three integrated and linked steps: data analysis followed by analysis of policy options and discussion of policy implementation.

This report focuses on industrial development and economic transformation, what needs to be done and how to make it happen. But there are obvious, wider development implications. The Government of Tanzania decided to merge the FYDP and National Strategy for Growth and Reduction of Poverty (NSGRP) planning frameworks (the Kiswahili term is MKUKUTA). The current priority FYDP focus on industrial development in economic transformation therefore also needs to be explained in terms of human development. Broad-based sectoral improvements (including agriculture and services) remain important for economic transformation and human development, but traditionally industrial development has a special relationship with human development over the longer term.

Industrial development has three types of linkages with human development. Firstly, it leads to wealth creation and greater incomes throughout the economy. As this report shows, productivity is higher in manufacturing than in agriculture or in many service sectors and it grows faster than in other sectors, making its contribution to aggregate productivity growth more important than its share in employment would suggest. Faster technology adoption and innovation raises aggregate labour productivity and reduces prices, which raises real incomes and profits that allows faster investment.

The rapid promotion of exports of manufacturing is also one of a few proven routes to sustained job creation, with more, and higher quality, jobs increasing aggregate incomes. When manufacturing is further linked with other sectors, for instance when it adds value by processing agricultural and other commodities, it creates multiplier linkages throughout the economy and, hence, induced effects on human development.

Secondly, manufacturing growth builds resilience against external shocks by diversification out of commodities, and manufacturing exports provide much needed foreign exchange. Resilience to shocks protects the livelihoods of the poorest. Thirdly, industrial development based on broad-based private sector development often goes hand in hand with increased tax revenues, which helps to provide the budget to promote human development.

As there are strong linkages between industrial development, economic transformation and human development over the mid to long term, the FYDP also relates well to the Sustainable Development Goals (SDGs). Industrialisation and productivity change are directly linked to the economic SDGs such as SDG 2 and 9 and indirectly to the social SDGs (SDGs 1-5). Further, Tanzania’s vision of natural resource based industrialisation depends strongly on the sustainable management of natural resources (water, energy, land etc.). The adoption of environmentally friendly techniques could be a win-win for Tanzania.

The chapters in the report are structured as follows. Chapter 2 reviews the policy context around industrialisation in Tanzania, which provides the background to this study on informing the design of the second five year plan from 2016 to 2021. It discusses, for example, the changing role of the public sector in promoting industrialisation.

Chapter 3 reviews Tanzania’s economic development progress in an historical context, where feasible with a focus on the last five years (although this is hampered by the availability of data), and with a section on industrialisation in particular. It also examines briefly the record of achievement on the targets in the first FYDP. Chapter 4 analyses Tanzania’s performance in an international context. This helps in the formulation of feasible targets in Chapter 10. Chapter 5 discusses industries that Tanzania could prioritise, using a range of new data techniques as well as existing analyses. We do not push one view or one sector, but identify three priority types of sectors (including light manufacturing) that most studies and analyses would agree on.

Chapter 6 identifies specific and common constraints across the promising sectors. Chapter 7 reviews general policy suggestions to overcome the common constraints discussed earlier. The emphasis is on identifying those policies that help Tanzania’s aim of economic transformation through industrialisation in particular.

Chapter 8 discusses a resource mobilisation framework that can be used to mobilise and use finance for achieving the objectives of the FYDP II and industrialisation in particular (Appendix I does this also in general). Chapter 9 brings together the priorities identified in Chapters 7 and 8 around five priorities. The rest of the Chapter analyses the challenges that Tanzania has faced in the past when implementing industrial policies and uses that analysis to suggest different ways of working around these priorities.

All of these chapters build up to Chapter 10 on target setting around the objectives of economic transformation which can reasonably be attained in the FYDP, targets for supportive policies and targets for supportive ways of working. These targets should be considered targets for initial discussion and require wider consultation. Overall, we argue that there are some early signs of structural transformation in Tanzania. Tanzania needs to build on these by addressing generally agreed policy options. It can best do this in practical terms by implementing a number of collaborative projects that would illustrate how it can nudge the economy further onto a more transformational path. Chapter 11 concludes. We argue that Tanzania needs a radically different approach in the coming five years in order to seize the opportunities for industrialisation in a rapidly evolving environment.

» Download: Supporting the preparation of Tanzania’s Second Five-Year Development Plan: Final report (PDF, 4.92 MB)

Source: ODI
Website: Visit website
Date: 17 Jun 2016

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