February 8, 2008

 

Tanzania: Competition policy spurs economy-wide gains

Broader competition in Tanzania generated positive effects on firm-level exports, business investment and productivity.

 

 Increasing competition within an economy is no easy task. Many stakeholders, particularly workers in protected businesses such as monopolies and state-owned enterprises, fear for their futures when liberalization is introduced. However one Tanzanian researcher has shown that promoting fair competition improved the performance of local manufacturers at the firm level. This translates into gains for the overall economy.

  

No matter how well an economy is doing, politicians like to say that when a voter loses his job, for him, the unemployment rate is 100%.  It’s an old line, but it speaks to an important truth regarding the challenges that developing nations face when they try to boost competition within their economies.

 

That’s because a key obstacle facing reformers is that the benefits of increased competition, such as rising investment, better productivity and more exports, can be hard to explain. But everyone notices the link when inefficient state-owned businesses or regional monopolies, which are suddenly subjected to the market’s “invisible hand,” begin to shed jobs.

 

That’s what makes a recent study, titled Competition Policy, Manufacturing Exports, Investment and Productivity: Firm Level Evidence from Tanzania Manufacturing Enterprises, so important. The author, Godius Kahyarara, an economics lecturer at the University of Dar-es-Salaam, wanted to show that efforts by the Tanzanian government to protect consumers against monopolies did not unduly affect firm level performance. If he could do that, public policy makers would have an easier time selling reforms to the general public.

 

Kahyarara’s research was part of a broader initiative by the United Nations Conference on Trade and Development (UNCTAD) and funded in part by the International Development Research Council (IDRC) that looked into the broader issues of competition policy, competitiveness and development, in order to provide assistance to the growing number of developing countries that are attempting new initiatives in this area. Many such countries have been in a decades-long quandary regarding whether the promotion of competitive markets is more likely to empower the poor, a thesis the UNCTAD study affirmed, by assessing the specific experiences in a variety of nations, including Nepal, Thailand, Tanzania, Brazil and many others.

 

Tanzania’s challenges

Tanzania is one of the world’s poorest countries. To give a scale of the depth of poverty there, during 2006, Tanzania, which has a population of about the size of Canada’s (38.2 million v. 33 million) generated GDP of just $14.53 billion, one hundredth the size of Canada’s $1.45 trillion output.

 

Tanzania is heavily dependent on its agricultural sector, which according to the United States Agency for International Development (USAID) employs 45% of its population, but contributes only 80% of the country’s GDP. Tanzania’s agricultural sector’s low relative productivity, which is common among developing nations, reflects the importance of transformational growth in building its economy.

 

During recent decades, Tanzania’s public policy makers have been taking progressive steps to boost the country’s overall productivity. These include moving away from the dirigiste mentality that dominated the country’s elite since it obtained independence from Great Britain in the early 1960s, and which, despite the numerous steps that have been taken to move the Tanzanian economy away from the centrally planning of the 1967 to 1987 period, continues to inform large segments of the population.

 

Tanzania wasn’t alone in this regard. Prior to the 1980s, many developing nations chose to industrialize by instituting highly protective trade policies which were intended to shelter infant industries until they could stand on their own. However these policies proved to be mostly ineffective. They lead to the emergence of monopolistic or state-owned enterprises, many of which invested heavily, but were unable to build high rates of capacity utilization. The result was that many of these businesses slipped into increasing inefficiency coupled with over-reliance on government subsidies, merely to stay afloat.

 

This led to the creation of a substantial class of privileged workers, who were secure in their jobs, but whose performance was not significantly tied to productivity improvements in their workplaces. Compounding this problem was the fact that strong Tanzanian legal and regulatory impediments made it hard for managers to fire or transfer unproductive personnel.

 

However starting in the early 1990s, the Tanzanian government began to open up its economy by introducing a series of reforms in areas ranging from banking and foreign exchange to agriculture and investments. For an open market economy to thrive it needs to be backed by sound fiscal and monetary policy. But it also requires a solid foundation that includes secure property rights, effective contract enforcement mechanisms and a regulatory environment that does not overly constrain private sector initiatives.

 

Sound competition policy, which Tanzania, like many developing nations, has been making efforts to implement in recent years, was a key element in those foundations. Key milestones were the passing of the Fair Trade Practices Act in 1994 and more

importantly: the Fair Competition Act of 2003. The latter legislation’s key objective was to “enhance the welfare of the people of Tanzania by promoting and protecting effective competition in markets and preventing unfair and misleading market conduct.”

 

Among the new legislation’s expected results were increased efficiency in the production, distribution and supply of goods and services, new innovations, the efficient allocation of resources and enhanced consumer protection. New competition policy and law enforcement institutions, such as the Fair Competition Commission, which is charged with overseeing and implementing some many of the goals specified in the legislation, were also set up. Areas targeted by the anti-trust authority included the regulation of dominant firms, the control of mergers to forestall the emergence of new monopolies and the prevention of abuses such as predatory pricing.

 

Naturally, one of the key sectors to benefit from this approach was manufacturing, where output needs to grow substantially if the Tanzanian economy is effectively absorb the thousands of citizens flocking to its cities to escape the often-desperate poverty in rural areas as well as 400,000 new entrants that the burgeoning population is pushing the country’s workforce each year.

 

No adverse effect on firm level performance

The challenges faced by Tanzania mirror those in many developing nations, particularly those in sub-Saharan Africa. As a result the UNCTAD/ Kahyarara study’s research had the potential to influence developments far beyond Tanzania itself. That said, testing Kahyarara’s hypothesis that fair competition has a causal impact on the quality and quantity of manufactured exports, productivity and investment, was no easy task.

 

For example many of the swings in the performance indicators, which varied significantly over the 1966 to 2002 period from which he drew most of his data, could have been affected by variables other than competition policy initiatives. Other obstacles that could account for the fluctuating performance of Tanzania’s manufacturing sector over the years included pervasive widespread corruption in the country, low FDI flows, high real interest rates and poor credit availability and a host of other factors.

 

This led Kahyarara to drill down his efforts to study firm-level performance in areas such as investment, which he judged to be an important indicator of the structural barriers that protect an industry. This in itself was no easy task, since businesses can also be influenced by firm-specific criteria. That said, Kahyarara’s conclusion: that micro-economic data provides direct evidence that existing Tanzanian government policy (and institutions changed with overseeing fair competition) have succeeded in ensuring competitive production that is in line with the public interest, served as a key milestone. Furthermore, Kahyarara found a positive relationship between competition policy and productivity, investment and export performances.

 

However while there is growing awareness among many developing nations, even those staring from a relatively small industrialized base, such as Tanzania, about the need to implement competition related initiatives, there is no such consensus on the best ways to do this. Kahyarara’s study also provided stakeholders with some key guidance in this area.

 

In fact one of Kahyarara’s objectives was to identify the “prerequisites for the successful implementation of competition policy in developing nations and the mechanisms through which they may operate.” Kahyarara concluded that at a minimum, these policies must (a) restrain anti-competitive behaviour by domestic privatized firms, (b) limit abuses on monopoly power by mega-corporations created by the international merger movement and (c) promote development. The big challenges says Kahyarara, is that in developing nations the market’s “invisible hand,” does not always operate optimally. That makes identifying market failures and coming up with timely responses crucial to the success of these initiatives.

 

 

An ongoing process that can take time

The influence of competition policy on Tanzania’s overall economic growth is much harder to gage. The country’s GDP real growth averaged more than 6% in the five years up to 2005 and hit 6.2% in 2006. However while these numbers sound impressive, the country is growing from a staggeringly small base.

 

Furthermore, the Tanzanian population’s average age is quite low and the country is urbanizing at increasingly rapid rates. Under those conditions, fast economic growth is to be expected. On the other hand, Tanzania is facing such a vast array of challenges, ranging from health issues, to poor infrastructure and a relatively poorly educated workforce that even the best competition policy in the world cannot remedy on its own.

 

From the perspective of developing nations like Tanzania, Westerners can appear insensitive to the challenges that they are facing in implementing free market reforms such as effective competition policy. That’s because key industries in major Western economies grew and prospered behind extensive protective barriers too. Only after these industries had built up their competitive advantages did Western nations suddenly become advocates of increased competition both globally and as a prescription to increase efficiency within nations.

 

Even then, Western economies took many years to achieve the openness that they now have. For example, one of the initial and most important pieces of legislation regarding competition policy The Sherman Anti-Trust Act, was introduced in the United States in late 1800s. But subsequent initiatives, improvements and regulatory structures were introduced throughout the 20th century and continue even today. Furthermore, as the broader UNCTAD study (of which the Kahyarara research was just a part) showed, the adoption of competition laws alone, will not automatically be sufficient. In fact, if such laws are badly designed or implemented, they can even have a negative effect.

 

That said, there are indications that Kahyarara’s conclusions have had a significant impact in Tanzania.  As a result of the research, the country’s manufacturing industry stakeholders and the general public are now increasingly sensitive to many of the issues regarding fair competition. In fact the study also influenced the regulatory approach to both the country’s energy and telecommunications industries. 

 

In the meantime, Tanzanian public policy officials have a new tool that they can use to the handle objections of those who resist new competition policy initiatives which offer economy wide benefits, that are sometimes hard to quantify, on the grounds that there may a be few job transfers or losses in some businesses.

 

In short, a more constructive approach to evaluating the approach of developing nations like Tanzania towards competition policy is to regard its implementation as an ongoing process that takes time, of which the Kahyarara study was but one of many important steps. Furthermore to the extent that Kahyarara’s research was included in the UNCTAD report which has been studied, cited and quoted around the world, the Tanzanian case’s influence has now spread far beyond its borders.

 

Peter Diekmeyer (peter@peterdiekmeyer.com is a Montreal-based freelance business writer).

 

For more information

 

Dr. Godius Kahyarara

Lecturer of Economics

Department of Economics

University of Dar-es-Salaam

Dar-es-Salaam

Telephone number 0784-460-849.

gkahyarara@yahoo.co.uk

 

IDRC CRDI

 

Globalization, Growth and Poverty Program

International Development Research Centre

PO Box 8500, Ottawa, ON

Canada  K1G 3H9

 

phone: 613-236 6163

fax:     613-567 7748

email: ggp@idrc.ca

web:    www.idrc.ca/ggp

 

The International Development Research Centre (IDRC) is a public corporation created by the Parliament of Canada in 1970 to help researchers and communities in the developing world find solutions to their social, economic, and environmental problems. Support is directed toward developing an indigenous research capacity to sustain policies and technologies developing countries need to build healthier, more equitable, and more prosperous societies.

 

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