Tanzania - Growth, exports, and employment in the manufacturing sector

41668 TANZANIA: GROWTH , EXPORTS AND EMPLOYMENT IN THE MANUFACTURING SECTOR Vandana Chandra, Pooja Kacker and Ying Li PRMED Input for the CEM 2005  TANZANIA'S MANUFACTURING SECTOR: GROWTH, EXPORTS AND EMPLOYMENT INTRODUCTION Remarkably, over the past forty years, the share of Tanzania's manufacturing sector in its economy has remained virtually unchanged at around 8 percent of GDP (Table 1). For most of the first 30 years, government's experiment with state control and planning capped the share of the private sector in the economy at 12 percent. However, since the late 1980s, even after slow return to a market-based system, manufacturing's role in the economy is unchanged: the vision of structural change that could modernize this rural economy through diversification and industrialization remains distant. From a relatively small base, growth in manufacturing has picked up from about 2 percent per annum during 1990-1998 to 6 percent in 1999-03 (Table 2). In the last two years (2002-03), it rose to 8 percent p.a.. However, as growth in the other sectors has also accelerated, manufacturing's relative contribution to GDP, economic diversification and modern job creation is small. The overwhelming dominance of primary production, especially in the rural sector continue to challenge policy makers to think harder about what more needs to be done to unleash Tanzania's manufacturing potential to move closer to the vision of a modern economy. A vibrant manufacturing sector is critical for the Tanzanian economy for several reasons. First, as international experience has shown, manufacturing has been an important source of growth in several small countries, even in sub-Saharan Africa (see Boz ---- on Lesotho, Mauritius etc.), leading the way to a modern economy envisioned in the latest PRSP. Typically, a growing manufacturing sector triggers the development of ancillary activities and better-paying jobs vital for a modern economy. Second, a large manufacturing sector is necessary for export diversification to reduce Tanzania's dependence on external shocks caused by weather cycles and terms of trade fluctuations. The latter routinely affect its export earnings tied to a basket comprised primarily of primary commodities such as gold, and traditional agricultural products (coffee, cashews, tea etc..). Besides adding uncertainty to foreign exchange earnings, the adverse effects of terms of trade shocks also spillover to household incomes, especially of the rural poor. Weather shocks, such as droughts, frequently impact agricultural production that accounts for over 50 percent of GDP and the majority of livelihoods in this predominantly rural economy. As manufacturing is considerably less vulnerable to such external shocks, it is valuable as a potential source of growth, exports and jobs that can generate higher and more sustainable incomes. Why Tanzania's manufacturing sector has not yet developed into such a source of growth and what can be done to accelerate this process is the subject of this paper. 2  `Tanzania at the Turn of the Century' (CEM, 2001) examined the country's economic performance during 1960s