The evolution of industrial policy in Tanzania

The Industry and Trade minister, Prof Kitila Mkumbo, (centre) presents a passport and an air ticket to the Shayakye TRD managing director, Shakiru Yahya, for the latter to take part in this year’s Turkey-Africa Economic and Business Forum. Others are CRDB Bank’s retail banking director Boma Raballa (left) and head of business banking Toyi Ruvumbagu. PHOTO |THE CITIZEN CORRESPONDENT

By The Citizen Reporter

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Dar es Salaam. One of the serious grievances Tanganyika nationalists had against the British was that the latter had ignored the physical development of the territory,

especially, in as much as the physical infrastructure and creation of industries is concerned.
There were only about 660 miles (1,062 kilometres) of paved roads, mostly in urban areas. The available long distance roads existing were the Dar es Salaam-Morogoro; Arusha- Moshi; and Korogwe-Tanga. In railways the British found most of the infrastructure already in place. They only added the Korogwe-Moshi-Arusha; Moshi-Voi and the Kaliua-Mpanda. The link between Ruvu and Mnyusi which connected the Dar es Salaam-Morogoro and Korogwe-Tanga railway lines was constructed after independence. With the exception of beer and cigarettes Tanganyika had to import almost everything else, including matchboxes.
The lack of physical, soft and industrial infrastructure meant that foreign investors preferred Kenya to Tanganyika. And led the nationalists to charge that the British had ignored the industrial development of Tanganyika to benefit the Kenyan settler economy. This, they said, left Tanganyika as the perfect market for industrial products from Kenya and overseas.
When they were taking over Tanganyika as a Trust Territory the British ensured that the Trusteeship Agreement on the territory of Tanganyika that they drafted themselves and which were approved by the UN General Assembly at the 62nd plenary meeting of its first session on December 13 1946, gave them the right to include Tanganyika in customs union and common market with adjacent territories to cement Tanganyika’s position as a market for finished goods.. These adjacent territories (Kenya and Uganda) happened to be British colonies.
Article 5(b) of the agreement reads; the British “shall be entitled to constitute Tanganyika into a customs, fiscal or administrative union or federation with adjacent territories under (the British) sovereign control, and to establish common services between such territories and Tanganyika…”
In a paper entitled Industrial Development in Tanzania, Jamal Msami and Samuel Wangwe say the nature and structure of common external tariff policy favoured the interest of Kenyan industrialists.
To address concerns the British, together with multilateral institutions such as the World Bank started taking some steps to attract investments in industries from the 1950s onwards. The policy however was Import Substitution. This was facilitating the building of factories to manufacture products that were imported in high numbers to reduce transport costs from production centres outside the country. So instead of importing beers, cigarettes and sugar from Kenya and Britain, the colonialists facilitated the creation of such industries. That was how the World Bank through its International Finance Corporation invested in the Kilombero Sugar Company in 1960.

Efforts to attract private sector involvement
Also during the independence process (shifting of political power to the nationalists), which started after Tanu’s sweeping victory in the 1958/9 General Election and subsequent formation of responsible government, the British worked with the nationalists to create a development plan (Three Year Development Plan) was meant to fast-track development in such areas as physical and industrial infrastructure. The plan started being implemented in 1961 and lasted till 1964. The underlying industrial policy in the plan continued to be import substitution. The Plan was also aimed at promoting growth mainly through increasing investment in those activities that were expected to bring quick and high returns.
“A relatively low degree of regulatory control was exercised to promote private domestic and international investment in the economy,” Msami and Wangwe say.
After independence the Tanu-led government had decided that the private sector was going to be part and parcel of the industrialisation process. The fact that industrialisation is a technical and capital intensive process enabled the new government to arrive at this decision.
After independence the industrial policy continued to be import substitution with focus on processing and simple consumer goods, according to Msami and Wangwe. But determined to change the situation of Tanganyika as a ready market for goods for Kenyan factories, the new government took drastic measures to attract as much foreign investment as possible to create an industrial base. To reassure investors the Investments (Protection) Act of 1963 was enacted to give a certain level of protection to foreign investments. The Act provided a system by which overseas investors could apply for “Certificate of Approved Enterprise” to be granted by the minister for Finance to foreign owned enterprises which would “further economic development of, or would be of benefit to, Tanganyika.” The holders of the certificate were guaranteed the right to repatriate profits after tax, principal and interest of loans acquired and repatriation of proceeds gained after the sale or the company or during bankruptcy.
By working to attract foreign investors Tanganyika was in competition with other countries in the region, especially Kenya. Investors who came to East Africa had to choose between Tanganyika (later Tanzania) and Kenya. Both Tanganyika and Kenya policy makers were acutely aware of this. And it affected subsequent industrial policy formation. In the case of Tanganyika the hope was that some Kenya-based industries would come to open bases in Tanganyika to manufacture the goods that they previously exported to the territory. That is why the newly independent Tanganyika government kept the import substitution industrial policy. Aware of this the newly independent Kenyan government moved to adopt policies to restore investor confidence. There were worries among the new Kenyan government that investors would flee Kenya after independence out of fear of retribution following the Mau Mau war. In fact there was some capital flight in Kenya after independence. The whole issue created some kind of competition in industrial creation between Kenya and Tanzania.
The Kenyan government also moved fast and enacted the Foreign Investment Protection Act of 1964 was similar to the one created by Tanganyika the year before and offered similar incentives.
The Tanganyika Investments (Protection) Act of 1963 had minimal results. The government could not attract as many industries as it had expected. This led to frustration, because definitely more industrial investment continued to flow to Kenya. The existing customs and common service arrangements meant that Tanganyika continued to be a market for Kenyan goods, an arrangement that was not desirable to Tanzanian politicians. The first President Julius Nyerere expressed these concerns on June 8, 1965 when he was dissolving the independence Parliament at the Karimjee Grounds in Dar es Salaam. He said, “The amount of private investment which has taken place over the past year is, quite frankly, a disappointment to us. We have special tax concessions to encourage new investment; we have investment guarantees for bringing capital into the country; and we have many other arrangements designed to encourage private enterprise of a character which will serve our nation. Yet the level of private investment does not appear to be as great as that provided for in the Plan.”
Mwalimu Nyerere continued: “We have to do some more thinking about this, and see if there are legitimate complaints and problems which could yet be dealt with or whether it is largely a matter of misunderstanding.”
Some experts say the fact that tax and investment incentives failed to attract as many investors compared to Kenya’s was because of differing levels of infrastructure and industrial development between the two. The Tanzanian foreign investment protection act was also a bit ambiguous and could have raised suspicions among investors. While the Kenyan law gave definite assurances that no foreign investments under the approved certificate would be compulsorily acquired, except under the provision of the Kenyan Constitution (for public interest) the Tanganyika law gave no such assurances. In fact the Tanganyika law said plainly that investment in the approved certificate could be “compulsorily acquired by, or at the direction of, the government in furtherance of the nationalization…” But, of course, the law states that in such cases appropriate compensation would be given.

State-led industrialisation
After failing to attract sizable foreign investment in the industrial sector and because the National Development Corporation was doing a very good job in creating industries the government decided to move alone with the adoption of the Arusha Declaration in 1967. It nationalised the private industries and created some more.
Additional reporting by Alex Malanga and Hellen Nachilongo