From Africa - Competitiveness: Best Tool for Poverty Reduction

allafrica.com OPINION February 7, 2003 Posted to the web February 9, 2003 Adrian Njau

TANZANIA has the most abundant natural wealth in the world, and yet is among the poorest nations of the world. Among the natural resources it has are arable land, excellent tourist attractions, a variety of minerals, geographical position and inexpensive labour.

All these offer tremendous investment opportunities; yet the country has failed to attract significant investments to ease the abject poverty in which its people live. Join allAfrica's Discussion: How to Wage the War on AIDS >>

The incidence of poverty is worsening with the relentless march of globalisation that entails stiff competition all round. This is a definite threat that is making Tanzanians even more marginalised.

While the country has shown commitment in fighting poverty under the Government's Poverty Reduction Strategy (PRS), the most important thing now is how the country can become competitive in the new global dispensation. On paper, at least, the Government targets to reduce poverty by 50 per cent by the year 2025!

Reduction of poverty under the PRS can be attained if, and only if, the country would record a higher broader-based annual economic growth of between 8 and 15 per cent for the remaining 22 years to 2025.

To attain such an economic growth, Tanzania has two options to focus on: either to continue expanding primary exports, or to rely on expansion of the manufacturing sector.

As it is evident now, Tanzania has opted for the former strategy: expansion of primary exports, leaving the manufacturing sector out of its priority sectors needed to fight poverty.

Although the Government has not specifically formulated a Primary Export Strategy (PES), it is nevertheless clear from its Poverty Reduction Strategy Paper (PRSP) that the agriculture sector has been singled out as priority in its poverty reduction efforts.

The manufacturing sector is not considered as a priority sector toward poverty reduction under the PRS.

There is a wide consensus among Tanzanian economists and business analysts on the rationale of taking agriculture as the priority sector in the crusade against poverty.

They argue that Tanzania can easily become a successful exporter of primary goods than of manufactured goods. This is because the country has an abundance of natural resources such as fertile land, livestock, fish, minerals - and, more important, cheap labour.

Another rationale for choosing agriculture as a priority sector in poverty reduction is because agriculture is the mainstay of Tanzanias' economy. Over 80 per cent of Tanzania's labour force is employed in the agriculture sector, which alone contributes over 50 per cent of the Gross Domestic Product (GDP).

However, efforts in the past to fight poverty through primary exports has had very negligible or no fruits at all. This is due to the fact that, unlike many other countries, Tanzania's agriculture is geared on exports of unprocessed goods.

The best primary export strategy that has sustainable impact on national development is the one that concentrates on exporting processed products and not unprocessed exports.

Unprocessed primary resources face an unpredictable future in the world market due to its price instability and inelastic demand. Over the years, primary agricultural products such as sisal, coffee, cotton and tea have been experiencing continued decline in prices in the world market.

For Tanzania at least to gain from agriculture, it needs to shift from exporting unprocessed agricultural products to processed ones after adding some value to them.

Success in poverty reduction depends heavily on how best Tanzania can shift from a country of comparative advantages to one of competitive advantages.

While during the old days of comparative advantage, countries were relying on abundant natural resources and cheap labour, countries have today embraced new paradigms of competitive advantage where countries are making strategic choices in global markets.

Under the current situation in the global markets, abundant natural resources, inexpensive labour and fertile soil - which are the basis for comparative advantage argument -are no longer sufficient as an engine of growth.

For example, Venezuela and Nigeria, even with abundant natural resources of oil reserves, have failed to fight poverty altogether through using their oil. Starting commercial drilling in 1914, Venezuela became the world's No 1 oil exporter in 1928 - and the fastest growing economy in the world between 1920 and 1980. Oil still accounts for a third of the country GDP; yet Venezuela remains among the poorest countries in the world!

It is beyond doubt that excess dependence on natural resources prevents diversification. The fluctuations of unprocessed agricultural product prices in the world market has resulted in huge exchange rate fluctuations in those countries - including Tanzania - that heavily rely on exporting unprocessed exports.

Large exchange fluctuations make investment unpredictable, pushing up interest rates to a point at which no legitimate business can afford to borrow.

The average lending rate in Tanzania is above 20 per cent, while the deposit rate is average below four per cent - too wide a gap!

Exchange rate fluctuations are even worse, with the Tanzania shilling depreciating year after year. While the shilling was traded at Tsh917 per US dollar in January last year, it depreciated to Tsh1000 per dollar on May 20, 2002. It now averages out at Tsh985 per dollar.

This situation teaches us that Tanzania has to move away from the old world of comparative advantage and embrace the new world of competitive advantages. We should not be exporting today what we were exactly exporting in the early 1960s. We need to diversify our exports over time, regardless of how much we are earning from it. This should not only be the practice in agriculture, but also in other sectors such as mining and tourism.

What we are earning from mining now (especially in gold exports) can be reinvested in other sub-sectors because we know for sure mining (of gold and other minerals) is not sustainable.

We can learn from what is happening to Zambia now after its earnings from copper started to decline. The same happened to Ghana with its gold. Currently, gold accounts for about 50 per cent of Tanzania non-traditional export earnings. But, despite heavy investments in the mining sector, many Tanzanians do not receive any significant benefits from the sector!

We must also turn our comparative advantage in agriculture into a competitive one. It is high time we focused on exporting processed agricultural products and not raw produce. Adding value to agricultural produce will make our goods more competitive rather than just exporting them in raw form.