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Pros and cons of liberalisation - manufacturing in Tanzania

The effect of Tanzania’s wide-ranging economic reforms on the performance of its manufacturing industries has been the focus of debate. How far have protectionist policies of the pre-liberalisation era rendered domestic firms vulnerable to increased competition? Has the removal of market distortions facilitated greater long-term efficiency? Research by the University of Nottingham finds that the effects of trade liberalisation on Tanzania’s manufacturing sector have been diverse. The impact of trade liberalisation is determined mainly by firms’ export-orientation, and the strength of competition from imports.

Liberalisation involved adjustment costs as inefficient enterprises were closed or restructured. Did the removal of protectionist distortions facilitate long-term efficiency? Adjustment can help manfufacturing: trade liberalisation can increase the incentives to exporting while macroeconomic stability can greatly improve business confidence and performance. Liberalisation may also be expected to facilitate enterprise by encouraging privatisation and attracting foreign investment.

None of the potential beneficial effects of liberalisation were evident in Tanzania in the early 1990s. Macroeconomic instability persisted and manufacturing exports were negligible; privatisation has progressed slowly, although foreign investment was increasing in the late 1990s. Research findings include:

Few Tanzanian firms export, and most that do export a relatively small amount of their output (comparable to findings for other African countries).
Firms that sustain investment are more likely to export (this is not related to ownership).
Company earnings are the principal source of investment funds.
A majority of firms report domestic firms as the main source of competition, while about a third give imports. Most firms reported an increase in competition from imports between 1993 and 1995.
Under trade liberalisation exporters can benefit but other firms, especially those competing with imports, face a more competitive environment.

Policy implications include:

Trade liberalisation has increased competition from imports - this poses a threat to many domestic firms (and recent evidence suggests they are suffering).
Firms that export some of their output have been better placed to face the competition following liberalisation, but may not have increased exports.
Limited access to funds is a major constraint for investment; firms without adequate company earnings cannot turn to the banking sector (which is very inefficient).
Foreign investment, especially in equity shares, is an increasingly important source of funds.
Slow privatisation may have helped shelter some firms with government ownership from the increased competition from imports.

Source(s):
‘Determinants of Exports and Investment of Manufacturing Firms in Tanzania’, CREDIT Research Paper #98/5 (CDP005) University of Nottingham, by L. Grenier, A. McKay and O. Morrissey (1998)
‘Competition and Business Confidence in Manufacturing Enterprises in Tanzania’, CREDIT Research Paper #99/2 (CDP008) University of Nottingham, by L. Grenier, L. McKay and O. Morrissey (1999)
‘Exporting and Ownership in Tanzanian Enterprises’, The World Economy, Vol. 22/7 by L. Grenier, A. McKay and O. Morrissey (1999)

Funded by: UK Department for International Development (DFID), Trade and Enterprise Research Programme (Research Grant CNTR 96 0494A)

id21 Research Highlight: 13 February 2001

Further Information:
Oliver Morrissey
School of Economics and CREDIT
University of Nottingham
Nottingham NG7 2RD, UK

Tel: +44 (0)115 951 5475
Fax: +44 (0)115 951 4159
Contact the contributor: oliver.morrissey@nottingham.ac.uk

School of Economics and CREDIT, University of Nottingham, UK

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