Introduction
In recent years, poor industrial performance under socialism in Tanzania has been blamed squarely on state-led industrial policy (World Bank 2002). Formally, industrial policy is the official strategic effort to develop the industrial sector; however, in practice industrial policy encompasses a number of different policy areas and institutions for promoting investment and technology acquisition. Reforms to industrial policy under liberalisation dismantled much of the formal framework of state support to industry that had been constructed during the socialist period. In its place, industrial policy was reoriented towards encouraging private sector manufacturing through privatisation, promoting foreign direct investment and implementing a number of trade related policies to encourage manufacturing for export. Initial reforms led to a collapse in manufacturing and a severe process of deindustrialisation (Semboja and Kweka 1998) but after 1996 there was a return to expansion with manufacturing growing at an average of 7% per year (World Bank 2011). While this was an improvement of growth rates compared to the 1980s, this represented a return to the manufacturing growth rate of around 7% achieved from independence to the mid 1970s (Kim 1986). In recent years, therefore, the manufacturing sector has remained small and undiversified (Kahyarara 2011) but manufacturing growth has occurred across a number of low value-added activities including food and beverages, garments and textiles. The growth of manufacturing under liberalisation appeared, at least superficially, to confirm the neoliberal view that reducing state interventions in the market would lead to higher growth by reducing price distortions and clientelist corruption within the state (Krueger 1974). According to the theory, this would allow a return to a path of industrial growth determined by fundamental cost structures where comparative advantage would be found in low value-added manufacturing based on low wages and natural resource extraction (Balassa 1977).
Over a longer time horizon, however, weaknesses in the neoliberal account of manufacturing growth in Tanzania under liberalisation become apparent. This is because the neoliberal account underplays the historical role of the state in industrial development in Tanzania by ignoring critical elements of the legacy of socialist industrial policy for subsequent industrial development under liberalisation. It also misses vital aspects of the political economy of the state in Tanzania that explain some of the deeper constraints on successful industrial policy that have persisted under both the socialist and liberalised eras. Outside the narrow focus on liberalising markets of the neo-classical mainstream, success and failure of industrial policy in developing countries have been extensively examined through heterodox economic theories of ‘developmental states’ (Wade 1990; Amsden 1989; Evans 1995). These theorists identified certain institutional features of the state that enabled a high degree of central control over industrial policy rents where rents are understood as the state interventions that create incomes over and above a market return. State-created rents are widely recognised as necessary for successful industrialisation in developing countries given the requirements for a period of ‘learning-by-doing’ in order to catch up with the productivity levels of advanced industrialised countries (Gershenkron 1962). Theories of ‘developmental states’ suggest that the most important aspect of centralised control by the state was that the state was able to exert a credible threat that if rent recipients did not improve their performance, the rent would be removed.
A common view was that examples of ‘developmental states’ would be absent from Africa because of the dominance of ‘neopatrimonial’ politics that would enmesh industrial policy in redistributive clientelist relations (Easterly and Levine 1995). Yet this view has been challenged by those who have pointed to the ubiquity of clientelism in Asian developmental states (Kang 2002) and to the historical role of African states in fostering development (Mkandawire 2001). A focus on state institutions, however, can only take us so far. This is partly because while the state may adopt formal industrial policies, the effectiveness of these policies may be constrained, not by the formal structure of state institutions, nor by the existence of clientelism per se, but by the wider distribution of power in society (Khan and Blankenburg 2009; Di John 2009).
The combination of political institutions and the distribution of power between historically constituted contending groups, in the form of classes, fractions of classes or multi-class clientelist networks is captured by the concept of the political settlement (Khan 1995, 2010).1 A social distribution of power depends on a range of socioeconomic factors. Economic resources are one factor in the power of any social group; yet, the distribution of political power is not simply a function of the distribution of economic power. The multifaceted construction of political power involves the ability of different groups to organise politically, drawing upon ideas, force and institutions, to protect or demand particular structures of property rights, including claims to incomes created by industrial policy. This process occurs both within and outside formal political institutions. An understanding of the social distribution of power that affects the implementation of state policies, including industrial policy, therefore needs to be constructed from a reading of social and economic history, looking at the past outcomes of social conflict as well as the organisation of production.
This article explores how the political settlement in Tanzania has shaped the implementation of industrial policy since independence. The first section of the article examines industrial policy during the socialist period and the second section examines three key elements of industrial policy under liberalisation: privatisation, encouraging foreign direct investment and export incentives for manufacturers. The article argues that many features of the political settlement that are relevant for industrial policy implementation have been common to both the socialist and liberalised periods of Tanzania's first 50 years of independence. These critical facets relate to the institutionalisation of political power within the ruling party, the relatively equal distribution of power between intermediate class groups within the state, the limited success of attempts to restructure economic power under socialism and the difficulties in constructing a relationship between the state and capital under liberalisation that would allow the state to channel subsidies while monitoring their use.
Tanzania's political economy has frequently been explained in terms of the legacy of centralisation of political power within the institutions of the ruling party, Chama Cha Mapinduzi (CCM), and the suppression of alternative political institutions during the socialist period (Lockwood 2005). Yet within this centralised institution, the actual distribution of power between different factions of the intermediate classes that ran the state was relatively equal. The low level of social and economic differentiation in society more broadly, facilitated the centralisation of power within TANU as there was less scope for political mobilisation outside of the party structures. This was partly a result of the relatively short and largely constitutional nature of the independence struggle (Pratt 1976) as well as the smaller number of intermediate class groups,2 due to limited socioeconomic differentiation. Thus, the appearance of centralised power within Tanzania's ruling party was based on a fluid political balance between factions at the centre rather than a strong centralised leadership that could impose decisions upon senior Party officials. The article argues that during the socialist period, industrial managers were able to evade the compulsions of state-led industrial policy because of the degree to which actual control was fragmented between intermediate class groups within the state structure. Yet the shift away from state-led industrial policy did nothing to address these underlying political constraints and they continued to shape the implementation of industrial policy initiatives under liberalisation.
The other critical aspect of Tanzania's political settlement for industrial policy relates to the complex and often ambiguous relationship between capital and the state since independence. One of the key political aims of the socialist period was to restructure the colonial inheritance of economic power that was largely in the hands of foreign and non-indigenous capitalist groups. Yet, half of all industrial activities remained within private hands during the socialist period and covert relationships between those holding economic power and those holding political power subverted aspects of industrial policy. Despite a formal commitment by the state to promote the private sector, the relations between existing and emerging non-indigenous capitalist groups and the state remained complex under liberalisation. The political difficulties in implementing a more effective industrial policy, where the state could channel resources to developing manufacturing capabilities while disciplining capital, were not addressed by the focus on market liberalisation. This hampered the success of the much more limited set of industrial subsidies offered under liberalisation through Export Processing Zones and international initiatives to promote manufactured exports. The dominant neoliberal approach to industrialisation based on market liberalisation and privatisation did little to address these more fundamental political constraints that faced Tanzania in bringing about an industrial transformation.
Socialist industrial policy
On independence, Tanzania had a tiny and largely foreign-owned industrial sector that was dominated by agro-processing and a number of low value-added manufacturing activities. Until 1967, industry continued to grow along the lines established during the colonial period. The main objective of industrial policy at that time was to create productive capacity within the sector, rather than to redress the racial imbalance in industrial ownership inherited from the colonial period; foreign investment was central to this aim (Costello 1994). This early phase of industrial policy was important in establishing an industrial sector from a very low base and for expanding the role of Tanzanian–Asian petty capitalists in industry.
Industry grew rapidly during the 1960s. This was largely because of a number of state subsidies and tariffs on manufactured imports that made manufacturing profitable as part of a strategy of import substituting industrialisation. Tariffs were often set based on discussions between investors and the Ministry of Commerce and Industry rather than through a cohesive industrial strategy (Rweyemamu 1979). Nevertheless, industrial policy was initially successful insofar as expansion and diversification of the industrial sector took place; for example, Tanganyika's first five textile mills were established between 1961 and 1968. The ownership structure of industry also changed during the first years of independence. Colonial restrictions that had reserved certain industrial activities for British firms were removed (Silver 1984) and the spread of the co-operative movement into trading activities encouraged a shift of Tanzanian–Asian petty (and not so petty) capitalists out of trade into industry (Coulson 1982). Thus, in the early 1960s there was a rapid growth in Tanzanian–Asian manufacturing; firms such as Sunguratex and Kilitex producing textiles were established, as well as Kioo Limited for glass bottle manufacturing and ALAF (Aluminium Africa Ltd) for aluminium products.
The Arusha Declaration of 1967 spelt out a more activist role for the state in the industrialisation process with the intention of bringing about a productive economic transition as well as the radical restructuring of economic power by limiting the expansion of domestic and international capital. This was to be achieved primarily through nationalisation of segments of existing industries and the creation new industrial parastatals. Given the lack of an indigenously owned industrial sector, almost all the industrial firms that were nationalised were owned by Tanzanian–Asians (Mukandala 1988). Yet despite the commitment to transforming economic power in industry, the extent to which nationalisation changed the ownership structure of industry was, in many ways, quite limited. The urgent need to generate economic growth within the existing social structure led the state to adopt a de facto cautious approach to the reform of ownership patterns in industry. Nyerere himself argued that private investment was necessary for the development plans of the country and that government and business should work together to achieve this (1968). The result was that half of all industry remained in private hands throughout the period (Bigsten and Danielson 2001). Further, many of the new parastatal investments were undertaken as joint ventures between the state and the private sector so that the private sector often continued to have important ownership stakes in nationalised firms (Silver 1984). In other cases, the previous owners stayed on as managers under the new ownership structure. This was the case for the National Milling Corporation, created in 1967 by the merger of eight private sector milling factories. The owner of the largest private domestically owned milling factory, Jayantilal Keshavji Chande, was appointed as general manager (Coulson 1979) and he maintained close relations with the CCM throughout the Ujamaa and the liberalisation period.
While private investment was seen as necessary for industrial development, open political relations between the state and the Asian–Tanzanian private sector became increasingly difficult over the period. From the end of the 1960s, calls for nationalisations by the Party grew and open hostility by some members of Parliament towards domestic private sector industrialists, often framed in overtly anti-Asian language, became more common (Brennan 2005). Nyerere was frank about the fact that many of the Ujamaa policies were designed to redress racial imbalance in economic power (Nyerere 1968). This meant that while the private sector continued to play a role in industry, its existence was often overlooked in development plans in order to avoid any obvious commitment to the existing private sector that could alienate the Party's main political base (Hartmann 1990).
Given the political constraints on attempting to develop private sector industry, the main focus of formal industrial policy was on the state-owned industrial parastatals. While the extension of state control was meant to transfer power to workers and to peasants, in reality, economic control was increasingly vested in an expanding group of party, bureaucratic and management officials (Shivji 1976). The types of industrial policy rents available to industrial parastatals included direct state subsidies, access to finance directly from state owned commercial banks, foreign concessional financing by donors for specific projects, as well as rents related to import substitution such as those created by tariffs and exchange rate policy (Bigsten and Danielson 2001). As with many other import substitution strategies adopted by developing countries, manufacturing activities with the highest rates of effective protection in Tanzania were the consumer goods industries, particularly the less durable and luxury goods type (Rweyemamu 1979) and most industry was focused on assembly-type activities at the last stages of production (Coulson 1982).
Industrial policy under socialism led to an expansion of industrial parastatals which in turn drove the growth of industrial output and industrial diversification. Labour productivity also grew up to 1973, mainly as a result of rapid capital investment (Szirmai and Lapperre 2001). The creation of an industrial base from virtually nothing was an important achievement of the socialist period and had significant implications for industrial development under liberalisation. Yet despite high levels of investment and capital accumulation, the sector quickly began to show signs of poor economic performance. As the 1970s progressed, the contribution of industry to overall growth declined and became negative by the end of the decade. The major problem was that the high investment rates that were maintained in the 1970s were coupled with falling productivity. The main cause of this was the chronic underutilisation of capacity, falling to below 30% across manufacturing enterprises through the 1970s (Bigsten and Danielson 2001) and to less than 10% capacity utilisation in many textile mills by the mid 1980s (Ladha 2000). Some cases were even more extreme; for example, the Morogoro Shoe Company, built with donor finance to produce shoes mainly for export, never reached more than 4% of installed capacity (Temu and Due 1998). In many parastatals, underutilisation of capacity coexisted with continued investment in capacity expansion (Wangwe 1979).
As efficiency and profits fell, industry became increasingly dependent on state subsidies to survive. By the end of the 1970s, 11% of total government expenditure was dedicated to direct subsidies to parastatals (Costello 1994). The size of the parastatal was a critical factor in determining the level of subsidy that could be negotiated with the central state. From the end of the 1970s, the state tried to reduce the growing cost of subsidisation and parastatal influence through a rationalisation programme that involved splitting up existing parastatals into smaller units and attempting to cut down on the overall number of parastatals. These policies were largely subverted from within as managers made deals with supportive politicians and bureaucrats within line ministries to expand by establishing new subsidiary parastatals, starting new branches or new areas of activities (Mukandala 1988). Instead of reducing the overall number of parastatals a proliferation took place over this period.
Conventional approaches to understanding this kind of severe underutilisation of capacity in industry focus on the extent to which state-led industrial policy distorted ‘market’ prices through very high levels of effective protection for import substituting industries and restrictive trade policies (World Bank 2002). This ignores other critical reasons for poor industrial performance under socialism in Tanzania. Some of the reasons for this failure to drive up industrial productivity relate to the sheer scale of the industrialisation challenge facing Tanzania. As a new nation with limited industrial experience and economic resources, problems such as shortage of inputs, foreign exchange limitations and poor infrastructure were huge constraints that Tanzania shared with other poor countries seeking to pursue ambitious industrialisation strategies. Beyond these reasons, however, was a political problem relating to the compatibility of industrial policy with the underlying political settlement.
The expansion of subsidies coupled with falling productivity suggests that the power of the central party institutions to manage the industrialisation process by disciplining rent recipients of the kind that was used in successful ‘developmental states’ was largely absent during the socialist period. Despite the apparent formal political centralisation of power endowed by the dominance of party institutions within the state, the central leadership within the Party could not effectively impose discipline on different parts of the state responsible for industrial policy. Crucially, the Party could not force managers to use subsidies efficiently. Managers were able to maintain their hold on state-created industrial rents even when their performance was poor. Managers of parastatals were very much part of the cohesive intermediate class group that ran TANU (Shivji 1976; Mukandala 1988). However, the Party was not able to discipline this group as they were able to make coalitions with supportive bureaucrats and ministers to maintain rents despite poor performance.
The Party attempted to reduce the power of parastatal managers, initially by removing many of the parastatals from under the National Development Corporation (NDC) and placing them under the direct control of parent ministries (Coulson 1982). However, this did not address the underlying weakness of the central authority of the Party to impose its will on its different constituent parts. The stable and inclusive coalition within TANU gave the overall appearance of strength, but central control over the constituent parts was actually quite weak. Once the economic crisis had taken hold by the early 1980s, manufacturing output effectively collapsed. Parastatal managers increasingly engaged in illegal activities to bolster their falling incomes and racketeering became common. Racketeering involved managers trading goods illegally at high prices based on their monopoly status. This form of corruption usually involved collusion between parastatal managers, CCM state officials and traders from the dwindling numbers of petty capitalists who sold the goods on the black market (Tripp 1997). Political leaders were outspoken in their condemnation of these activities but were relatively powerless to stop them (Maliyamkono and Bagachwa 1990). In 1983, Operation Economic Saboteur championed by Edward Sokoini, the popular Prime Minister, led to the imprisonment of thousands of Tanzanian–Asian shop keepers identified as having undermined the central planning system. Importantly, these arrests were not indiscriminate but targeted those in the commercial class who did not have links to the Party (Maliyamkono and Bagachwa 1990). Informal links between the private sector and the state were therefore in existence prior to liberalisation and continued to play a role in the accumulation strategies of the emerging private sector in industry.
Industrial policy under liberalisation
From the early 1980s, the political consensus on industrial policy slowly consolidated around the conclusion that state-led industrial policy interventions during the Ujamaa period had hampered successful industrialisation, because of high levels of corruption and market distortions. Along with many other developing countries, the answer that was adopted was to reduce industrial policy rents and withdraw state ownership in the industrial sector (Campbell and Stein 1992). The initial liberalisation in the 1980s of prices, distribution, trade and exchange rates had a negative impact on the industrial sector. Controls on the prices of manufactured goods were among the first group of price controls to be significantly reduced. Controls on domestic trade and marketing of all imported and domestic manufactured goods were also dismantled. In practice, even by the end of the 1980s, unofficial markets and a very lax regime on imports meant that state control of the distribution and price of manufactured products had come to an end (Husain and Faruqee 1994). These reforms reduced the effective rate of protection for manufactured goods and as a consequence, many of the poorly performing manufacturing parastatals found it increasingly difficult to sustain themselves. As a result, the industrial sector shrank considerably until 1996 (Semboja and Kweka 1998).
The new market-led approach to industrial development was set out in the Sustainable Industries Development Policy 1996 to 2020 (United Republic of Tanzania 1996). The policy articulated a desire to attract foreign investment into industry as well as expanding the indigenously owned industrial sector through the promotion of small and medium industrial activities. The industrial policy tools for achieving these aims involved a limited set of state interventions focused on privatisation, encouraging foreign direct investment and promoting manufactured exports. Nevertheless, while industrial policy rents were scaled back under liberalisation and reoriented towards private sector manufacturing firms, similar political constraints on the state that had influenced state-led industrial policy continued to hamper their effective implementation. The deeper political determinants of industrial policy success were not addressed by the neoliberal market reforms.
Privatisation
The privatisation programme in Tanzania was similar in most respects to other privatisation programmes of the era across Africa, implemented under the tutelage of the International Financial Institutions (White and Bhatia 1998). Many of the larger and more profitable manufacturing firms were sold to international buyers. Other smaller manufacturing parastatals, most of which were not operational, were sold off as asset sales to local purchasers. A considerable number of the privatised manufacturing firms were actually sold back to their pre-nationalisation owners (Waigama 2008). A number of firms that had been involved primarily in trading activities during the socialist period bought up industrial parastatals. For example, Mohammed Enterprises, expanded its manufacturing activities by buying up industrial parastatal assets and Aluminium Africa (ALAF), producing roofing sheets, was sold back to Chandaria Group (Kenya) which had been the former owner (Gibbon 1999). The extensive dismantling of the industrial parastatal sector through privatisation in the early stage of liberalisation meant that the pool of industrial managers who could have used their experience of the industrial process and their political power within the state to launch new private sector industrial activities was relatively circumscribed. This is in contrast to Vietnam, for example, where a larger industrial state sector was maintained under liberalisation in which state managers became de facto emerging capitalists (Fforde 2004; Gray 2012). By 2000, only 1% of manufacturing firms remained in state hands. Foreign ownership had expanded significantly and 25% of manufacturing firms had some, and often significant, degrees of foreign ownership (Chandra et al. 2007). The number of manufacturing firms owned by Africans had also expanded to around 44% but this was largely in small and micro enterprises (Ibid). While indigenous manufacturing did expand after liberalisation in very small-scale manufacturing activities (Tripp 1997), medium to large-scale industrial activities were predominantly returned to the ownership of non-indigenous and foreign capital. By 2002, Asian capital accounted for around 26% of all manufacturing firms (Chandra et al. 2007).
Liberalisation heralded the development of more open relationships between domestic capital and the state. The resurgence of the private sector was accompanied by a gradual inclusion of business people within the formal framework of the ruling party. Formal institutions linking the private sector and the state were created, such as the Tanzania Business Council, chaired by the President. An increasing number of CCM MPs also came from the private sector (Mmuya 1998). Prominent Tanzanian–Asian businessmen such as Mohamed Dewji, Chief Executive of Mohammed Enterprises, and Rostam Aziz gained formal positions of power within the Party. Yet, the relationship between non-indigenous capital and the state continued to be complex and often ambiguous in many respects under liberalisation. Hostility towards Asian capital was exhibited in the ferocious public debate about ‘uzawa’ (indigenisation) across the period (Heilman 1998; Kelsall 2003). The Sustainable Industrial Development Policy called for the state to enact specific policies to promote indigenous manufacturing. In reality however, the industrial policy institutions, such as the Small Industries Development Organisation that could have fostered the growth of indigenous industries faced considerable budget constraints over the period of liberalisation (Mukama and Yongo 2005). Other organisations that focused on local manufacturing initiatives, such as the Tanzania Industrial Research and Development Organisation, became increasingly oriented towards providing commercial services such as repairs, rather than engaging with local industrial research and development (UNCTAD 2002). The liberalised financial sector also failed to provide adequate credit facilities for domestic manufacturers (Odhiambo 2010; Wong et al. 2007).
The informal relations that had been constructed between state and capital through clientelist relations towards the end of the socialist period became increasingly apparent under liberalisation. Numerous cases of grand corruption that came to light over the period in the media were indicative of the close informal relations between senior CCM politicians and business figures (Gray and Khan 2010). Critically for the success of industrial policy however, the closer formal, and informal, relationships between capital and the state did not mean that the state had developed a greater political capacity to discipline industrial policy rents. The neoliberal argument for privatisation of industrial assets was that the private sector would use industrial assets more efficiently and with less scope for corruption between state officials. However, privatisation did not address the deeper political constraints on the implementation of industrial policy. An example of the continued problems of corruption within industrial subsidisation occurred in loans given to the General Tyre East Africa Ltd. The General Tyre East Africa Ltd had been established in 1971 and had been the largest industrial plant in East Africa. In the mid 1990s, Continental AG bought a 24% stake in the company and promised to revive production (Mikaili 2011). In 2005, the performance of the company was still very poor and profitability had not improved despite privatisation. The company was able to persuade the government to agree to a subsidised loan through the National Social Savings Fund (NSSF) of US$10 million to enable the company to purchase raw material and restart production (Ihucha 2011). This type of loan to a poorly performing company was very similar to the loans available through the nationalised banking system to weak parastatals. Six years later, production at the plant had not been revived and auditors found that the loan had been squandered by the management (Mikaili 2011).
The shift in the pattern of industrial ownership from state to the private sector did not, therefore, insulate industrial subsidisation from the types of corruption that were seen to have hampered industrialisation under socialism. Perhaps more importantly for Tanzania's industrial performance, neither does it seem to have strengthened the state's capacity to monitor industrial policy rents, such as subsidised finance, available to industry. Rather, the process of privatisation was driven by the neoliberal consensus that the market alone can drive technology acquisition and capability development in developing countries. The problem of devising a successful industrial policy system that could channel resources to the growing private sector to finance learning while also imposing discipline on the rent recipient were clearly not resolved by the privatisation process.
Promoting FDI in industry
Under liberalisation, the major strategy for inducing technology acquisition in industry was delegated to the promotion of foreign direct investment (FDI). A formal policy of promoting FDI was adopted and the 1990 Investment Act and 1997 Tanzania Investment Act liberalised regulations restricting foreign ownership across all sectors of the economy. Yet the ability to attract investment into industry under liberalisation was not simply a result of returning to market-determined prices but related to critical actions of the state that lowered the cost of doing business in Tanzania. For example, the legislation provided a number of ring-fenced incentives to attract foreign investment. These included removal of ownership restrictions and performance requirements, a fiscal stability clause that provided a guarantee to investors that incentives would not be modified ex post, removal of restrictions on the repatriation of profits and the currency in which transfers could be made (United Republic of Tanzania 1997). These ring-fenced incentives had a strong and positive impact on FDI flows into the industrial sector overall and into manufacturing. By 2008, the manufacturing sector accounted for around 21% of total FDI stock, second only to the mining sector that accounted for around 28% (Bank of Tanzania 2009). The inflow of FDI was a major reason for the return to growth in manufacturing by the end of the 1990s (World Bank 2002). The credibility of these fiscal incentives for investors was strongly influenced by Tanzania's reputation for political stability in the eyes of foreign investors (UNCTAD 2002). Thus, the overarching political architecture that attracted foreign capital into industry had little to do with market liberalisation per se. Instead, the political stability that made Tanzania attractive to foreign investors primarily resulted from the legacy of the attempts to centralise political power within the party and restrict forms of political competition that had occurred during the socialist period.
Further, FDI into manufacturing came in predominantly to firms where capabilities and had already been established during the previous period of state-led industrialisation rather than to establish new industrial activities. While the assets of many of the smaller manufacturing parastatals were not returned to manufacturing activities after privatisation, much of the growth in manufacturing output was driven by a handful of large manufacturing parastatals that had been taken over by foreign capital (Afrodad 2007). These were producing low value-added goods for the domestic market such as beverages, tobacco, chemicals and plastic. A number of these firms experienced a dramatic improvement in their performance; for example, Tanzania Breweries Ltd increased capacity utilisation from 10% in 1992 to over 90% in 2001 and the Tanzania Electrical Goods Manufacturing Company increased capacity utilisation from below 50% in 1995 to 100% by 2001 (Waigama 2008). From the end of the 1990s, other manufacturing sectors such as textiles and garments also began to grow again after the severe disinvestment of the early 1990s and similarly in this sector a number of the larger firms had operated as parastatals during the socialist period or were based on upgraded units that had been purchased through the privatisation process (Ladha 2000). State-led industrial policy in Tanzania therefore played a role in establishing the industrial base and subsidising the attainment of industrial capabilities that were subsequently important for the return to manufacturing growth under liberalisation.
Manufacturing export promotion
While foreign direct investment into industry expanded under liberalisation, the ability of the state to manage the more limited set of industrial policy tools that were designed to drive productivity growth in industry by promoting manufactured exports were much less successful. Most of the manufacturing sector remained oriented towards the domestic market after 1986 but exports of manufactured goods stared to increase from the end of the 1990s and by 2005, exports of manufactured goods had tripled, albeit from a very low base (Treichel 2005). However, the incentive schemes to promote manufactured exports seem to have had quite a peripheral impact on export performance. A number of international schemes that created potential subsidies for Tanzanian manufacturers to export were established during the liberalisation period. The most important of these were the US African Growth and Opportunity Act (AGOA) and the EU Everything but Arms (EBA) initiative, as well as market access initiatives from France, Japan and Canada.
Tanzania qualified for the wearing apparel provision and lesser-developed country status of AGOA in 2002. This meant that it could import textile inputs from non-qualifying third countries. Despite the incentives offered by these programmes, the impact of rents generated by international export initiatives appears to have had quite a weak impact on industrial performance. The majority of goods exported through AGOA were agricultural and forestry products rather than manufactured goods (Kweka 2004). Even in the years following Tanzania's qualification for textile exports, the total volume of exports under this programme remained extremely low, accounting for under 1% of the total volume of exports to the US. The entire quantity of exported textiles were produced by just a handful of factories (Kweka 2004). Overall, AGOA only achieved a moderate supply response and limited dollar earnings for the country in comparison to neighbouring countries such as Kenya, Uganda, Malawi and Ethiopia (World Bank 2005).
Aside from these international initiatives, the most important aspect of domestic industrial policy was the establishment of Export Processing Zones (EPZs). Legislation to permit the establishment of EPZs came relatively late to Tanzania as it was only in 2002 that the Export Processing Zones Act established the legal framework for EPZs. The policy logic of the EPZs was to attract investors into manufacturing by offering tax incentives and subsidised infrastructure and to impose some compulsion on improving productivity through requirements to sell in international markets.3 After considerable delays in setting up the programme, the management of EPZs was given to a newly established parastatal, the Export Processing Zone Authority (EPZA), under the Ministry of Trade and Industry in 2006. In the first years of the EPZ programme construction on three EPZs started in the Dar es Salaam area and by 2010 five industrial parks had been gazetted (Meru 2010) and future EPZs and SEZs were earmarked for 14 regions (Mweta 2010).
Yet even after the first parks had been established, the total number of firms operating inside the physical EPZs remained very low. The vast majority of manufacturing continued to be outside these zones; in 2005, only 2.7% of manufacturing firms were located within an EPZ (Chandra et al. 2007). One of the main reasons for this was that the EPZs themselves operated poorly in their first decade of existence. Subsidised infrastructure, that, along with fiscal incentives, was supposed to be one of the major attractions for setting up within an EPZ, was severely deficient. Unreliable power and water supplies, undependable infrastructure and expensive administration costs were all identified as major constraints on firms operating within EPZs (Khan and Gray 2006). In 2005, of the three EPZs established in Dar es Salaam, only one had sufficient infrastructure, while basic facilities such as electricity and roads were lacking in the other two (World Bank 2005).
Another limitation was the lack of on-site customs offices and management offices. A World Bank survey of EPZs in Africa identified that the clearance times within Tanzanian EPZs were actually worse than for manufacturing firms outside EPZs (Farole 2011). While the clearance procedures for EPZ firms were established by law, many customs agents working at the port and airport were unaware of the system. Serious port delays significantly hampered the EPZ programme. The fact that duty-free access arrangements were implemented by many different government agencies, especially the customs authority (Ibid.) also caused delays. Fragmentation of control over delivery of the programme, in particular the difficulty in enforcing performance from infrastructure providers meant that subsidised industrial incentives were difficult to obtain for firms located within the Zones. The problem was not simply a technical issue about co-ordination between state institutions but also related to the fact that the success of the EPZ programme depended on the transfer of significant infrastructural subsidies to industrialists whose political legitimacy remained contested throughout the period.
Yet while the overt subsidies to EPZs were politically difficult to achieve, the informal relations between state and capital continued to influence the effectiveness of industrial policy. By far the most common way for the EPZ initiative to be rolled out was by granting individual businesses EPZ status, without requiring them to be located within a specific Zone. By 2010, 19 stand-alone EPZ licences had been issued. These were overwhelmingly given to domestic manufacturers rather than international firms. This contrasts with the international experience of countries with high labour-intensive manufacturing growth through EPZ programmes, such as Vietnam, where most of the firms in the scheme were foreign-owned (Malesky 2008). The stand-alone aspect of the EPZ programme attracted existing domestic producers to switch into the EPZ programme to attain the fiscal incentives. The mechanisms for ensuring that these firms changed their existing pattern of production and export orientation, however, were not very effective and this undermined the success of industrial subsidies provided through the EPZ programme.
Questions remained as to whether some firms in the EPZ programme were fulfilling their export requirements, although evidence for this largely emerged from reports in the media rather than from cases of corruption taken through the courts. In 2006 a case was widely reported of fiscal incentives that had been granted to a textile firm on condition that it met requirements for exporting. NIDA was among the first textile and apparel making companies to operate under an EPZ licence (Mande 2007). In addition to the fiscal incentives offered as part of the EPZ programme, the company managed to negotiate a special tax exemption from the Ministry of Finance for the importation of raw materials from its parent company in Pakistan. NIDA had asked the Ministry of Finance to grant it zero per cent import duty on extra-wide grey fabrics materials of a width wider than 80 inches, which it claimed was not available within Tanzania or the region (Chhatbar 2006).
The company claimed that the imports of raw material were essential for the operation of its textile mill (Tarimo 2006). Other industrialists strongly opposed the exemption on the grounds that NIDA would flood the domestic market and have an unfair advantage. They also claimed that the raw materials were available from within Tanzania (Chhatbar 2006). A committee was subsequently established to review the granting of the exemption made up from the Ministries of Industry, Trade and Marketing, and Finance, the Tanzania Revenue Authority and the CTI (Mande 2007). The final decision reached by Government was that the exemption could stand as long as NIDA exported 50% of its output (Correspondent 2006). This was below the official minimum export requirement for an EPZ licence.
Poor enforcement of export requirements of the EPZ programme under liberalisation echo the earlier failures in industrial policy management under socialism where parastatal managers, state officials and members of the private sector were able to evade the compulsions attached to state subsidies for industrial development. Yet the weakness of clientelism as an explanatory factor, in itself, of economic performance is clear from the numerous examples from Asia that show that clientelist relations are not inimical to successful industrial policy. Nor is it the case that successful industrial policy necessarily requires a highly centralised state. Political configurations underlying successful industrialisation strategies have varied considerably between countries (Moore 1966). The compulsion on industrialists to use industrial policy rents productively can come from sources other than a centralised state. Indeed, developing countries such as Vietnam (Gray 2012) and Bangladesh (Khan 2009) that lacked the type of highly centralised political order that characterised the rapid developers in North Asia experienced faster labour-intensive industrialisation through a similar set of industrial policy incentives as Tanzania under liberalisation.
In the cases of Bangladesh and Vietnam, aspects of their political settlements, such as the prior changes in agrarian structures, extent of primitive accumulation, the nature of competition between capitalists as well as the specificities of the relationships between the state and emerging industrial capitalists meant that the subsidies provided by export promotion schemes under liberalisation were effective at driving a more rapid process of labour-intensive industrialisation. In Vietnam, similarly to Tanzania, many of the elements of industrial policy under the control of the central state were not very effective under liberalisation (Perkins 2001). Yet, in contrast to Tanzania, the much denser legacy of decentralised industrial activities of the state meant that there was a high level of competition between emerging capitalists from within provincial and local levels of the state. The relatively decentralised distribution of power in Vietnam created a form of industrial disciplining that was sufficient to drive a very rapid expansion of low value-added manufacturing under liberalisation (Gray 2012).
Further, in other countries, the existence of a non-indigenous capitalist class, itself a relatively common legacy of colonial policy, did not preclude the development of more effective management of industrial subsidies. In Malaysia, for example, the ruling UMO party was able to establish a distribution of rents and incomes between the non-indigenous Chinese capitalists and the indigenous Malay that facilitated a rapid industrialisation (Jomo 1993). This suggests that it is possible to construct successful industrial policy even where the majority of industrialists have limited political legitimacy.
The underlying conditions in which liberalised industrial policy was more effective in these countries relate to differences in the balance of power in these societies that reflect specific historical trajectories of contested socioeconomic change rather than the degree of market liberalisation, as argued by neoliberal economic theory or the degree of state centralisation, as argued by the developmental state school.
Conclusion
Mainstream economics has mainly approached the history of industrial policy in Tanzania by highlighting the failures of state intervention. However, by rolling back the state and conflating an industrial strategy with trade liberalisation, industrial policy under liberalisation failed to address the critical political constraints on industrialisation. Examining the political economy of industrial policy in the socialist period and its legacy under liberalisation is a central part of understanding these constraints. State-led industrial policy was important in terms of the creation of a manufacturing base that did not exist prior to independence. Nevertheless, the failure to bring about a productive industrial transition limited the legacy of a creation of an industrial workforce and cadre of industrial managers who could have played a role in the emergence of domestic industry under liberalisation. With the abandonment of the commitment to an alternative, more egalitarian path of industrial development, the pace of industrial development has been influenced by the extent to which the state can support capitalist accumulation strategies in industry. The expansion of foreign direct investment in manufacturing, often on the back of previous industrial investments made under state-led industrial policy, was facilitated by aspects of the political settlement under socialism, such as the construction of the one-party state. This limited political competition and left a legacy of a stable political order that appealed to foreign investors.
In terms of the emergence of domestic industry, industrial nationalisations were much less encompassing than is often recognised and half of all manufacturing remained within private hands. Informal relations were constructed between the remaining private sector and the state that continued to influence accumulation strategies within industry under liberalisation. Liberalisation may have had little impact on levels of corruption but perhaps more importantly it did little to strengthen the capacities of the state to manage industrial policy. As well as the technical and ideological constraints on industrial policy under liberalisation, there were political challenges for the state in supporting an inequitable process of capitalist industrial development that was seen to benefit foreign and non-indigenous capitalist groups. The much more limited set of industrial policy tools available to Tanzania under liberalisation were woefully inadequate to meet the enormous challenges of developing domestic industry. The result was a continuation of the longer historical trajectory of a gradual and uneven path of industrialisation in Tanzania.
Note on contributor
Hazel Gray is an LSE Fellow in the Department of International Development at the London School of Economics. Her research interests concern the political economy of development. In particular, her research explores the political economy of the state, economic development in Africa and the political economy of socialism in poor countries in the twentieth century. She completed a doctorate at SOAS entitled ‘Tanzania and Vietnam: A Comparative Political Economy of Economic Transition’ in 2012. Previously, she worked as an economist at the Ministry of Finance in Tanzania.