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Growth and Poverty in Tanzania: A need for positive structural transformation and the role of

agro-industrial innovation systems

 19th ANNUAL RESEARCH WORKSHOP

Ledger Plaza Bahari Beach Hotel Dar es Salaam, Tanzania

April 09-10, 2014

By Dr. Bitrina Diyamett

STIPRO

Introduction Growth and Poverty: Some theoretical perspectives. The crucial role of positive structural transformation and

the importance of industry in poverty eradication. The Tanzania situation: transformation and industry

situation. Transformation process and crucial role of agro-industrial

innovation system building. Concluding remarks and policy recommendations.

Outline of the Presentation

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It is now universally accepted that economic growth is a necessary condition for poverty alleviation.

As countries become richer, on average the incidence of income poverty falls (World Development Report 2000/01 ).

It is income which has the greatest implications for poverty than all other aspects.

- According to (World Bank, 2001), other indicators of well-being, such as average levels of education and health, also tend to improve along with income poverty.

Introduction

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Tanzania has, over the past 10 years or so, been growing on average of 7%

But level of poverty reduction has been disappointing, and levels of destitution has increased. For instance during the 10 years of steady growth, purchasing power of Tanzanians have been falling drastically (NBS, 2010)

Introduction-2

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Growth is a necessary but not a sufficient condition According to Osmani (2003), there are three factors that

affect the incomes of the poor :o Growtho Extent to which growth enhances decent employment potential,

including of the pooresto Extent to which the poor are able to Integrate into economic

processes.

Growth and Poverty: Some theoretical perspectives

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Growth must therefore come from economic sectors with high capacity to generate employment.

Sustainable and poverty reducing growth will ultimately depend on structural transformation, which is the movement of resources from low productivity to high productivity employment.

The process starts with the modernization of agriculture to a modern industrial society. As economies move up the ladder of development, services sectors would gain importance (Timmer, 2007).

Growth and Poverty: Some theoretical perspectives-2

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Every territory in the world has followed this pattern with the exception of those who had no agriculture to begin with (such as Hong-Kong and Singapore) (Timmer, 2007)

The transformation process which follow the standard pattern is considered superior because along with raising productivity and standard of living, also comes institutional, organizational and cultural changes which make the society as a whole to be more capable, productive, innovative and peaceful (Singh, 2006).

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Growth and Poverty: Some theoretical perspectives-3

A large body of empirical evidence demonstrates that the manufacturing sector must play a key role in a country’s economic development if wealth and jobs are to be created.

- Manufacturing has a ‘pull effect’ on other sectors of the economy. The development of the manufacturing sector stimulates demand for more and better services: Banking, insurance, Business services, IT, communication and transport, and further job creation (US Institute of Manufacturing, 2009.

Crucial role of industry (Manufacturing) in the

transformation process

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Service

Agriculture

Industry and manufacturingothers

Tanzanian Situation

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i) Structure of the economy

The structure of the economy indicate Tanzania has become prematurely service oriented, without prior growth in agriculture and manufacturing; and without improved standard of living.

The growth is from low knowledge and employment intensive sub-sectors of retail trade and repair activities.

If normal trend is followed, service orientation of economies tend to be accompanied by high income, and high quality of life; and it is from knowledge intensive sub-sectors of R&D, IT services, financial, logistics and communications industries.

Tanzanian Situation-2

i) Structure of the economy

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ii) Manufacturing situation.

Structure of Exports by Technology Classification for Tanzania and Comparators

Source: Tanzania Industrial Competitiveness Report, 2012

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Tanzanian Situation-3

Source: Source: Tanzania Industrial Competitiveness Report, 2012

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Tanzanian Situation-4

Technology and innovation status

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Tanzanian Situation-5

Technology and innovation status

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Tanzanian Situation-6

Technology and innovation status

Our own research Very limited innovation of higher degrees of novelty in the

manufacturing sector. A study focusing on metal and engineering sector (Diyamett,

2010) revealed that of the 50 surveyed firms, 60% were innovative, but only imitation and minor modifications.

Another study on the role of FDI in local technological capability building (Diyamett, Ngowi and Mutambala, 2011) revealed that over 80% have largely basic and some intermediate technological capabilities.

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Tanzanian Situation-7

Technology and innovation status

Basic and intermediate technological capabilities include:

- Modification of designs, minor improvements, quality control, Introduction of new design for manufacturing

This is the same for FDI firms; as a result there is very little learning taking place between local companies and FDI

The same is for the companies in EPZ (Thomas, 2012).

- Most of the companies in EPZ demonstrate low level of technological capabilities.

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Tanzanian Situation-8

Technology and innovation status

We have shown that Tanzania has undergone premature structural transformation, with a very small manufacturing sector with very low level of innovation.

We argue that this to a large extent is responsible for much of the poverty and destitution in Tanzania.

What is needed is a vibrant and innovative manufacturing sector, achieved through positive structural transformation.

The challenge is how guide the process.

Transformation process and crucial role of agro-industrial innovation system building

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We know (from literature) that positive transformation process start with productivity increase in agriculture, giving way to industry and then service in terms of employment and contribution to GDP.

But there is very little ex-ante explanation on how to influence the process – only the ex-post observation.

However theoretical and some limited empirical observation indicate that promotion of agro-industrial innovation system in the early days of the transformation process is the way forward.

Structural Transformation and the concept of agro-industrial innovation system – some

conceptual thinking

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The trick is to focus on both agriculture and industry at the same time; instead of one at a time –relegating the other to buyer or user status.

Agro-industry includes all the post-harvest activities involved in the preservation and processing of agricultural products for intermediary or final consumption.

But if we focus our analysis on agro-industrial innovation system, then the farming activities become part of the system. Innovation systems defined as a set of institutions (and actors) whose interactions determine the innovative performance of firms (or farms) (Nelson, 1993).

Structural Transformation and the concept of agro-industrial innovation system – some conceptual thinking-2

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Types of actors normally involved are producers, buyers, suppliers, knowledge, policy and financial institutions.

The concept of innovation systems rests on the premise that understanding the linkages among these actors is key to improving their technological capabilities.

Analysis normally focus on national or sectoral levels. For the concept of agro-industrial innovation system the

focus is on the inter-sector

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Structural Transformation and the concept of agro-industrial innovation system – some conceptual thinking-3

1) Denmark The focus on agro-industrial complexes rather than

individual sectors : e.g. through this, milk and meat processing has led into vast innovations in machinery and equipment for milk and meat processing (Edquist & Hommen, 2008).

Which has fostered Danish strongholds within these technological fields internationally.

The industrial policy was on the complex, rather than on milk and meat industry, and manufacturing as separate sectors.

The concept of agro-industrial innovation system – some

empirical evidence

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2) UK key productivity-growth sector of British industrialization

was agriculture (Smith 2007). British agriculture and food processing industry

development led to such epoch-making innovations as replaceable parts, technical codification, assembly lines, etc. (Smith 2007).

The concept of agro-industrial innovation system – some empirical evidence-2

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Empirical observation in Tanzania indicate that farmers get ideas and knowledge for innovation more from the agro-processers, who are also major buyers than from R&D organizations:- A study on the role of FDI in local tech capabilities

(Diyamett, et al, 2011), indicate that over 90% of those who innovated got ideas and knowledge from the agro-industry.

- Another study on the sectoral systems of innovation (Diyamett, et al, 2014) indicates very low level of innovativeness except for those farmers who have strong linkage with the agro processing firms such as coffee, cotton, sisal, wheat, and tea.

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The concept of agro-industrial innovation system – some empirical evidence-3

In general it seems structural transformation has to start with the development of the agro-industrial innovation systems or agro-industrial complex (a terminology used in Denmark).

Literature indicate that generally agro-industry is dominant in the early days of structural transformation: Their contribution to total manufacturing is 61 percent in agriculture based countries, 42 percent in countries in transformation and 37 percent in urbanized developing countries (GAIF, 2008).

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The concept of agro-industrial innovation system – some empirical evidence-4

With the idea of the agro industrial innovation system analysis, the analysis does not end with analyzing the agricultural systems of innovation, but proceed to the related agro processing industries.

Some limited empirical evidence in Tanzania indicate that those agro-industries present in both local and export markets are more innovative than those that are serving local markets alone.

Competition with imports have been expressed as a major challenge.

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The concept of agro-industrial innovation system – some empirical evidence-5

There is strong empirical evidence that markets and interactive learning with buyers (sophisticated) are decisive in innovation and productivity growth.

According to Freeman (1992), markets and scientific possibilities are two decisive factors in innovation.

-And it is the sophisticated demanding customers (either actual or potential) that can trigger the search for scientific possibilities, including highly qualified human resources.

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The concept of agro-industrial innovation system – some empirical evidence-6

For the concept of agro-industrial innovation system or agro-industrial complex the following has to be assured:• linkage between agricultural sector and agro-processors in

terms of markets and interactive learning.

• but markets and interactive linkage have to be assured for the agro-processors as well.

The above will trigger the search for scientific possibilities and other associated capabilities.

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The concept of agro-industrial innovation system – some empirical evidence-7

Much of the delink between Tanzanian growth and poverty reduction can be associated with the abnormal structural transformation – to low skills and less employment intensive subsectors, without productivity growth in agriculture and industry.

Given the presented theoretical and empirical evidence, we argue that the direct connection between the agricultural and industrial sectors (in the form of agro-industrial innovation systems or complex) is inevitable for successful structural transformation.o it is not either or, but both, in complex interaction.o markets being the major decisive factor.

Concluding remarks and some policy recommendations

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Following are emanating policy recommendations: Identify a number of agro-industrial complexes that

Tanzania have a comparative advantage (market potential, both local and export).

The trick is to look at the trade balance. For instance the case of edible oil for Tanzania where the local demand is big, and over 50% of it being imported.

Create effective linkage between farmers and processors Make sure that small holder farmers and SMEs become part

of the complex.

Concluding remarks and some policy recommendations-2

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Deepen knowledge economy around the chosen agro industrial innovation systems or complex, including R&D system, input supply for farmers, and machinery for the agro-processors, finance for both farms and firms.o Inputs (fertilizers, pesticides) to be locally made – take advantage of

the emerging gas industry.o R&D for agriculture to be connected with agro-processers as well.

Promote export for the agro-industry, e.g. through EPZ

Find a way to protect local industry from cheap imports. Ensure periodic review of innovative activities and productivity

increase in the complexes, and continuously adjust policies.

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Concluding remarks and some policy recommendations-3

Thank you very much for your kind attention

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