Demena, BA (Binyam Afewerk)

Mmari, DE (Donald)

Msami, Jamal

van Bergeijk, Peter

English

EUR Research Repository

PB  18/2021June 2021         By Binyam A. Demena, Jamal Msami, Donald Mmari and Peter A.G. Van Bergeijk  Key Messages    • Tanzania’s exports are 15% to 25% below potential. • Tanzania is lagging Kenya, Uganda and Rwanda on logistics and Ease of Doing Business; its weakest spot is in the category ‘Trade across borders’. • In our panel for the Democratic Republic of Congo (DRC), Kenya, Malawi, Rwanda, Tanzania, Uganda and Zambia we find an export productivity premium for nationally owned firms of almost 9 percentage points. • Beneficial international specialization based on comparative and competitive advantage is possible and a viable strategy for these seven countries, but not all sectors can benefit as there are winners and losers from stronger international competition. • Regular training programmes are an important instrument to enhance productivity. Trade, Productivity and competitiveness   Introduction An important goal in the next five-year national development plan (FYDP III) is the achievement of an export-led competitive economy. The goal is challenging because Tanzanian export volumes have been under pressure since 2015. As illustrated in Figure 1a, real exports contracted over the years 2016 to 2018. Indeed, at the end of 2018 the volume of exports was 23% below the previous peak level of 2015. Fortunately, trade rebounded in 2019, with a spectacular increase although the volume of trade was still about 5% below previous peak and some 30 to 40% below potential as indicated by the trendline in Figure 1b. This finding is also supported by detailed econometric analyses using a PPML gravity trade model that we have used to estimate the direct and/or partial equilibrium effect of processing time and cost (in terms of documentary and border compliance). Indeed, while the developments in 2019 are encouraging, the general trend in the years before the partial rebound provides a warning that export competitiveness and logistics need urgent policy attention.  Figure 1 Development of Tanzanian exports 2000-2019  -15%-10%-5%0%5%10%15%20%25%2000 2005 2010 20151a Real growth rate of exports and 5 year moving average Real export growth5 per. Mov. Avg. (Real export growth) Likewise, there was a variation of the provision of e-information opportunities across government ministries websites. For instance, as Table 2 depicts, on average, the difference between them was 10%. Furthermore, the rate of provision of four government ministries (A2,6,7,8) was above 50% while that of three government ministries (A1,3,5) was below 50%. One government ministry (A3) did not give any information category on their website. Note. Blank means Not Applicable Source: Fieldwork data, 2016                        ---- trend based on 2000-2015, inclusive  Source: calculations based on World Bank, World Development Indicators  Therefore, this policy brief aims at assessing the trade development and competitiveness of Tanzania by assessing the productivity of its firms against the background of further integration into the East African Community (EAC). The note addresses both the export premium of an internationalization strategy, the opportunities for specialization within the EAC and the impact of the challenges that currently are hindering trade competitiveness.  Finally, the brief provid s recommendations on how to enhance trad  competi iveness and remove policy bottlenecks in order to reap the significant trade potential. This rief is based on econometric research, literature evi w and informed by many sources i cluding backgr und interviews, field research, government reports, academic papers as well as non-governmental reports.    Policy and Competitiveness Figure 2 provides a spider web diagram for five factors often associated with export performance: trade policy and institutions, logistics, diversification and business climate and ‘Trade across borders’ that measures time and costs of border procedures. The further away from the center of the spiderweb the better a country’s performance. Tanzania is lagging Kenya, Uganda and Rwanda on most components; its weakest spot is in the category ‘Trade across borders’. Indeed, a recent REPOA policy brief (Msafiri 2021) concludes: ‘Despite numerous efforts taken by the government of Tanzania in enhancing port efficiency, port operations are still hindered by prolonged dwell time of local containers handled by TPA, prolonged dwell time of transit containers handled by TICTS and TPA’. Policy is of course very important, but even when policies are perfect, domestic firms may not be able to benefit from international trade. Therefore, the findings reported in Figures 1 and 2 need to be complemented with a comparative analysis of firm level productivity in Tanzania and its major regional trading partners.   0501001502002503003504002000 2005 2010 2015Figure 1b Volume of exports and trend index (2000 = 100)Figure 2 Spiderweb diagram of main policy determinants of export performance     Source: World Bank World Development Indicators and Ease of Doing Business  Firm level analysis: Export premium and productivity heatmap A key driver of international competitiveness is the productivity of the private sector. Productivity increases are not only important because such improvements are crucial for the success of an export-oriented growth strategy, but also because of the relationship between productivity and economic development. The basis for the analysis is a detailed econometric analysis (Demena et al., 2021) that uses panel data from seven major trading countries that are part of the tripartite free trade area of COMESA-EAC-SADC. The seven countries are the Democratic Republic of Congo (DRC), Kenya, Malawi, Rwanda, Tanzania, Uganda and Zambia. The panel covers the period 2013–2014 and consists of firm-level information for 4,488 observations. We first focus on the issue of the benefits of internationalization at the firm level for the panel as a whole, and then deal with the issue of sector level competitiveness in relation to international specialization on the basis of comparative advantage and the issue of winners and losers from trade liberalization and further economic integration of the EAC.  Export premium We first make corrections for industry structure and calculate normalized productivity levels. Using export and ownership dimensions, we identify four types of firms in Figure 3: National Domestic (locally-owned non-exporters), National Exporters (locally-owned exporters), Foreign Domestic (foreign-owned non-exporters) and Foreign Exporters (foreign-owned exporters). Figure 3 allows us to compare the difference in normalized productivity for these four types of firms: for example, for nationally-owned firms the export premium is almost 9 percentage points.   Figure 3 Normalized productivity levels by exporter status and ownership  We also analyzed these data in more detail distinguishing between manufacturing and services and always find a clear export productivity premium for national manufacturing firms and service sectors. We also find a clear foreign-ownership productivity premium for both non-exporting and exporting firms in manufacturing sectors, but not so in the services sectors. Moreover, we find that firm-level productivity increases when firms are larger and when they engage in regular training programmes. In the services sector, these effects are always smaller and only significant for medium-sized firms. In order to compare the productivity of the countries we developed a productivity heat map (Figure 4) where green indicates a relatively high and red a relatively low productivity level. The comparison can be made horizontally across countries and additionally we can vertically compare the productivity of a sector across countries. For example, for food, we see that firm-level productivity in Rwanda, Uganda and Zambia is higher that in Kenya, Malawi, Tanzania and especially DRC. We can also look vertically and see what sectors are strong within a country. For example, chemicals are red for Tanzania, indicating weakness in terms of productivity both within Tanzania and compared to the other countries.   Figure 4 productivity heat map  Tanzania DRC Kenya Malawi Rwanda Uganda Zambia Food        Textile     n.a.   Garment     n.a.   Wood         Publishing, media        Chemicals        Non-Metallic          Fabricated Metal         Furniture        Other Manufacturing        Avg. Manufacturing         Retail        Hotel and restaurants        Wholesale         Transport & communication        Services of motor vehicles        Other Services        Average Services        0%10%20%30%40%50%60%70%National Domestic National Exporter Foreign OwnedDomestic ProducerForeign Owned ExporterNormalized productivityFigure 5 Productivity, trade across borders and recent improvements of time to export  RwandaKenyaDRCZambia MalawiUgandaTanzania R² = 0.65628085909510010511011575 100 125 150 175 200Median normalized productivityRanking for trade across borders (2019)5a productivity and trade across bordersIt is important to note that due to data limitations this is a snapshot only and the snapshot is somewhat dated (2014 is the most recent year for which we have observations) and somewhat unsharp because we look at comprehensive aggregates that may hide underlying heterogeneity and because the sample size at the country level is relatively small. Therefore, the heatmap needs to be interpreted with caution. This being said, two robust and important conclusions emerge. First, the heatmap shows that beneficial international specialization on the basis of comparative and competitive advantage is possible when these countries get more integrated economically because of the different patterns of strong and weak sectors horizontally. Second, we find for all countries that there are winners and losers from stronger international competition. As discussed earlier the heatmap only gives an indication where sectors were in 2014, so the heatmap cannot be used to set policy priorities without   a detailed evaluation of current conditions on the ground. Still, the message is clear: not all sectors can benefit if (not tariff) barriers to international trade are reduced. Productivity in general depends on the health of the private sector and therefore productivity is to a large extent determined by a country’s business environment. Figure 5a focuses on one of the key determinants of the efficacy of international trade – that is the ease of trading across borders. The vertical axis reports index numbers for median normalized productivity by country. Focusing on EAC countries we observe that productivity levels in Rwanda, Uganda and Kenya exceed Tanzania by 7%, 9% and 13%, respectively. The horizontal axis reports the World Bank ranking for trade across borders. When we move down the ranking, we observe that productivity also decreases. Figure 5b by way of illustration reports one of the components of the Word Bank’s Ease of Doing Business ranking, namely the hours required for submitting export documents and their review by the authorities.  0204060801001201405b Time to export (hours) documentary compliance 2014 2019Tanzania already made progress between 2014 and 2019, as illustrated in Figure 5b, but the improvement was not sufficient in view of the reductions by Rwanda and Uganda, while the difference with Kenya remains a very important hurdle and a reason why trade is redirected via Mombasa or Nairobi in Kenya. Tanzanian exporters and importers have to deal with (too) many ministries and regulators. Government taxes and regulates activities that it wants to encourage, and the resulting policy incoherence reflect that the costs of taxation and regulation are not appropriately recognized. This provides a double challenge for policy makers because (a) competitiveness of value chains needs to be improved and (b) institutional and regulatory bottlenecks for international trade must be addressed as well.  Policy recommendations This note clarifies that a significant trade potential in the order of magnitude of fifteen to twenty five precent exists for Tanzania, but also that a major policy challenge needs to be addressed as the business climate needs to be strengthened and bottlenecks in logistics and in particular of the major trading hubs need to be solved. Our analysis finds that regular training programmes can offer support for this process as these enhance productivity both for exporters and non-exporters.  Our analysis cautions that the process towards an export-led competitive economy  will not be a free lunch and that next to winners there will also be sectors that will lose from trade liberalization, trade integration and international competitiveness.   A significant export productivity premium of almost nine percentage points has been found for exporting firms which is an encouraging finding that motivates in relation to efforts to strengthen EAC integration and validates the FYDP III goal to achieve an export-led competitive economy. References Demena, B.A., J. Msami, D. Mmari and P. A.G. van Bergeijk (2021), ‘Productivity premia and firm heterogeneity in Eastern Africa’, ISS working paper 680, ISS/Erasmus University: The Hague. Msafiri, D. (2021), ‘Assessment of Port Efficiency and Operations in Tanzania: A Case Study of Dar Es Salaam Port’, REPOA Policy Brief: Dar es Salaam.           This policy brief is an output of the project “Targeted support to strengthen capacity of policy makers, exporters, and trade associations to assess and review trade and related economic policies to promote trade competitiveness and diversification for widening trading opportunities with the EU”.                                                                REPOA Resource Centre  Our Resource Centre provide a good environment for literature research, quicker, easier access and use of knowledge and information. It has full internet connection for online library to support Masters’ & PhD candidates, researchers and academicians with free access to latest journals, books, reports webcasts etc.   Opening hours The Resource Centre is open from Tuesday to Friday from 10.00am to 1.00pm, 2.00pm to 5.00 pm. The online library is open 24 hours throughout the week.      REPOA  Headquarter         Branch Office 157 Mgombani/REPOA Streets, Regent Estate, P.O. Box 33223, Dar es Salaam, Tanzania  2nd Floor, Makole East, Kisasa Tel: +255 22 2700083 Cell: +255 75 409 1677 Fax +255 22 2705738    Dodoma, Tanzania Website: www.repoa.or.tz Email: repoa@repoa.or.tz @REPOA 2021 Findings and opinions expressed are those of the author(s) and do not necessarily reflect the views or policies of REPOA and any of her partners in the TradeCom II Programme.  

Trade, Productivity and Competitiveness

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Trade, Productivity and Competitiveness

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