Promoting Trade Competitiveness in Developing Countries [1 ed.] 9781443868709, 9781443859110

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Promoting Trade Competitiveness in Developing Countries

Promoting Trade Competitiveness in Developing Countries

Edited by

Wineaster Anderson, Marcellina M. Chijoriga and John R.M. Philemon

Promoting Trade Competitiveness in Developing Countries, Edited by Wineaster Anderson, Marcellina M. Chijoriga and John R.M. Philemon This book first published 2014 Cambridge Scholars Publishing 12 Back Chapman Street, Newcastle upon Tyne, NE6 2XX, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2014 by Wineaster Anderson, Marcellina M. Chijoriga, John R.M. Philemon and contributors All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-4438-5911-7, ISBN (13): 978-1-4438-5911-0

TABLE OF CONTENTS

List of Figures............................................................................................ vii List of Tables .............................................................................................. ix List of Abbreviations .................................................................................. xi Preface ...................................................................................................... xiii Acknowledgements ................................................................................... xv Chapter One ................................................................................................. 1 Introduction: Enhancing Trade Negotiation Capacities amidst Globalization John R. M. Philemon Chapter Two ................................................................................................ 7 China’s Export Success: Who’s Behind It? Kyung-il Ghymn and Fan Liu Chapter Three ............................................................................................ 25 The Impact of China on the Economies of Sub-Saharan Africa: Opportunities, Challenges and Prospects Humphrey P. B. Moshi Chapter Four .............................................................................................. 39 Regulations and Competitiveness of the Food-Processing Sector in Selected African Countries Goodluck Charles and David Rwehikiza Chapter Five .............................................................................................. 67 The East African Community (EAC) and Its Influence on Tanzania’s Manufactured Exports Intensity and Competitiveness Deusdedit A. Rwehumbiza

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Chapter Six ................................................................................................ 91 Globalization, Foreign Direct Investment and Development: Some Opinions From Local Actors in Tanzania Huruma Luhuvilo Sigalla Chapter Seven.......................................................................................... 103 Promoting Trade Competitiveness in Developing Countries: A Case of Natural Resources and Competitive Advantage Amina Akida Chapter Eight ........................................................................................... 117 The Relationship between E-Government Status and Global Competitiveness: Evidence from 2010 Country Data Ulingeta O. L. Mbamba Chapter Nine............................................................................................ 131 Opportunities and Challenges of AGOA for Tanzanian Firms: Marvellous Flotea, a Successful Story Wineaster Anderson and John R.M. Philemon Contributors ............................................................................................. 143

LIST OF FIGURES

Figure 2-1 US Trade with China: 2000–2010. .......................................... 11 Figure 2-2 US Trade with China: 2000–2010. .......................................... 11 Figure 2-3 Share of US Computer Imports from China: 2000–2010. ....... 13 Figure 2-4 The FDI value in China from 1991 to 2010. ............................ 15 Figure 5-1 Tanzania’s manufactured export markets, 1997. ..................... 78 Figure 5-2 Tanzania’s manufactured export markets, 2006. ..................... 78 Figure 5-3 Tanzania’s versus the world’s manufactured export share in the EAC. .......................................................................................... 79 Figure 5-4 Growth of manufactured export intensity. ............................... 80 Figure 5-5 Tanzania’s intra-EAC manufactured export competitiveness. . 81 Figure 5-6 Growth of Tanzania’s intra-EAC manufactured export competitiveness. ................................................................................... 82 Figure 8-1 Graphical representation of the relationship between the level of e-government and competitiveness of countries ............. 127 Figure 9-1 General Tanzania Exports 1978–2010 (US$ millions). ......... 135 Figure 9-2 Examples of MFCL merchandise. ......................................... 138

LIST OF TABLES

Table 2-1 US Merchandise Trade with China: 1980–2010. ...................... 10 Table 2-2 US Merchandise Trade with China: 2000–2010. ...................... 12 Table 2-3 The Four Largest Sources of FDI in China, 1992–2010. .......... 18 Table 2-4 Total Value of MNC Exports: 2000–2010. ............................... 20 Table 7-1 Timber exports from Tanzania, July 2005 to January 2006. ... 108 Table 7-2 FOB prices (US$) for selected timber products shipped from Tanzania. ................................................................................... 111 Table 7-3 Price comparison of different hardwood products sold from West Africa. .............................................................................. 112 Table 8-1 Descriptive Statistics of GCI and EGI. ................................... 122 Table 8-2 Correlations of Coefficients. ................................................... 122 Table 8-3 Model Summary for Regression Analysis between EGI and GCI. ............................................................................................. 123 Table 8-4 ANOVA Tests. ........................................................................ 124 Table 8-5 Coefficients. ............................................................................ 125 Table 8-6 Collinearity Diagnostics. ......................................................... 126 Table 8-7 Residuals Statistics (a). ........................................................... 126 Table 9-1 MFCL Exports under AGOA during 2006–2008 (in US$). .... 139

LIST OF ABBREVIATIONS

AFTA AGOA ASEAN COMESA DANIDA EAC EBA EU FOCAC FTA ILO LGA MITM NAFTA NEMC OECD OSHA SUMATRA TAMPA TBS TFDA TFDA UDBS UNCTAD UNIDO WTO

Asian Free Trade Area The African Growth and Opportunity Act The Association of Southeast Asian Nations Common Market for Eastern and Southern Africa Danish International Development Agency East African Community Everything But Arms European Union Forum for Chinese–African Cooperation Free Trade Area The International Labour Organization Local Government Authorities Ministry of Industry, Trade and Marketing North American Free Trade Area The National Environment Management Council Organization for Economic Co-operation and Development Occupational Safety and Health Authority Surface and Marine Transport Regulatory Authority Tanzania Milk Processors Association Tanzania Bureau of Standards Tanzania Food and Drugs Authority Tanzania Food and Drugs Authority University of Dar es Salaam Business School The United Nations Conference on Trade and Development The United Nations Industrial Development Organization World Trade Organization

PREFACE

The University of Dar es Salaam Business School (UDBS) organized its first ever International Conference on Globalization and Development in Developing Countries in 2011. This conference provided a forum for academicians, practitioners and trade researchers from all corners of the globe to critically address globalization and developmental issues with the aim of provoking debate. The main theme of the conference was “Promoting Trade Competitiveness in Developing Countries”. Despite the critical importance of the trade sector and the country’s trade policy objective of achieving export-led growth for the realization of poverty reduction, studies have demonstrated that export-led drive in most developing countries is hampered by lack of entrepreneurial skills, limited knowledge of international trade opportunities and operations, limited knowledge of WTO requirements, and a lack of knowledge of international trade law. Concretely, it has been widely acknowledged that most developing countries lack the necessary “software capacity” for making a substantial and positive contribution to the international trade agenda. Because of this, their preparation for participating in various international consultations and negotiations on trade can be fairly judged to be largely ad hoc and only nominally inclusive. In a bid to address these and other handicaps in Tanzania, the governments of Denmark and Tanzania agreed to initiate the Business Sector Programme Support (BSPS III) which aim to, among other things, develop the business sector. Since then, UDBS has spearheaded international business and trade-related research, within the framework of its broad research agenda. The International Conference on Globalization and Development in Developing Countries and consequently this book are among the output of the BSPS III project funded by Danish International Development Agency (DANIDA). The book comprises nine edited versions of the papers presented at the conference. It is hoped that the contributions in this book, which range from the theoretical perspectives in trade and competitiveness, foreign direct investment, the involvement of China in Africa, agricultural trade and poverty alleviation, natural resource management, export promotion in developing countries and ICT, will stimulate healthy debate and help inform policy review processes in developing countries. The views and

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opinions expressed are those of the authors and do not necessarily reflect the official policy or position of DANIDA or UDBS.

ACKNOWLEDGEMENTS

We are grateful to DANIDA for funding the BSPS III project, to the University of Dar es Salaam Business School, to the chapters’ contributors, and to all the delegates of the ICGD-DC 2011.

CHAPTER ONE INTRODUCTION: ENHANCING TRADE NEGOTIATION CAPACITIES AMIDST GLOBALIZATION JOHN R. M. PHILEMON

Globalization, which is the spread and integration of people, goods, finance, knowledge and culture across the planet, with each of these dimensions having advanced since the dawn of civilization, at a pace determined by the available technologies for transport and communication, is inevitable. Globalization has had far-reaching consequences for almost every aspect of our lives, and will have potentially greater ones in the future. Developing countries stand to lose or gain from globalization, depending on how they manage the diverse dynamics that affect economic growth and marshal resources to their advantage. Experience shows that only a few developing countries have managed to take advantage of the opportunities offered by globalization or mitigate its negative and farreaching consequences. Most developing countries, Tanzania included, are still mired in the economic doldrums, mainly due to the lack of a proper understanding of the factors at play and management incapacity or inertia that prevents advantage being taken of opportunities. Like so many big events in the history of mankind, globalization has given rise to diverse controversies and debates, thereby polarizing opinion. The process has been supported and opposed by various people at different stages of its life. The director-general of the International Labour Organization (ILO), Juan Somavia, summed it up correctly when he said: For some, globalization has been an instrument for progress. It has created wealth, expanded opportunities and provided a nurturing environment for entrepreneurship and enterprise. But for others, it has exacerbated inequalities and insecurity. They fear that the risks are too great, the benefits too small. (ILO 2002)

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There are as many scholars supporting globalization as those opposing it. Mwapachu (2005), for instance, noted that globalization is a reality, and thus accepting or rejecting it is no longer a choice for Africa. In acknowledging the forces of globalization, Nyerere (1998) warned that even as we prepare ourselves for a competitive life in the global village, we must not forget that our corner in that global village is in Tanzania. Those who knew Mwalimu Julius K. Nyerere, the founding father of our nation, would argue that he would have been the last person to support globalization. However, he himself acknowledged its inevitability and the need for the nation to be prepared. Benjamin W. Mkapa, the third president of Tanzania and probably a singularly ardent supporter of globalization, warned developing countries: There are those who speak as if globalization is an option. Do we have any choice? As a nation we surely have choices. An utterly drastic one is to shut ourselves in a cocoon. It is an alternative. But no country has ever advanced by isolating itself from the regional or international community. We need the outside world. It can do without us; but we can’t do without it. (Mkapa 2004)

Globalization pre-dates Tanzania’s independence but its manifestations are increasingly intensifying as the instruments for change are becoming more sophisticated. Chachage (2009) noted that Africa in general and Tanzania in particular have been part and parcel of many of the processes associated with globalization for centuries. So whilst it may seem to be a new phenomenon, in essence it has been with us for ages. For years, globalization has been associated with commercialism, imperialism, racism, colonialism, nationalism and multiculturalism. Globalization has had its fair share of supporters and accommodators and those who oppose it outright. Each one of these three groups of scholars, bureaucrats and researchers has their seemingly strong arguments to back their position. The diversity of their thoughts, opinions and findings is what brings beauty to any globalization debate. Mbilinyi (2009), one of those who see no good in globalization, poses the question: “How can we challenge the politics of imperial globalization which continue to impose neo-liberal free market policies on African countries, when developed countries are strengthening regulatory state mechanisms and support for their own national economies?” Globalization, she asserts, creates and thrives on the immiseration of the masses, and clearly cannot be the source of either poverty reduction or poverty eradication. On the social front, a more or less similar sentiment is expressed by Chachage (2004), who argues that “globalization in one way

Introduction

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or another has been responsible for the erosion of people’s welfare, job destruction and mass unemployment.” Ndulu (2007) notes that in the current era of globalizing production systems, people move and jobs move. He goes on to argue in support of globalization by concluding that it has raised the potential for relocating skilled jobs to Africa through foreign direct investment and outsourcing, which have been a significant factor behind East Asia’s phenomenal growth. Similarly Mwapachu (2005) notes that globalization is a reality in the sense of the breakthrough in information and communications technology, twenty-four hour capital flows and the expansion of trade through transnational and multinational enterprises. Thus globalization cannot simply be wished away or halted. He therefore states that globalization makes it imperative for African countries to pursue regional integration, to maximize economies of scale and make prudent use of scarce resources.

Bringing diversity to the platform In appreciation of the diversity of thoughts and views, UDBS took the initiative of bringing together various trade stakeholders at an International Conference on Globalization and Development: A Developing Country’s Perspective 2011. The conference provided a forum for academicians and practitioners from all corners of the globe to critically address globalization and development issues, with the aim of coming up with suggestions that would lead to solutions to help improve the lot of developing countries. The theme of the conference was “Promoting Trade Competitiveness in Developing Countries.” Thirty-three papers were presented at the conference and thoroughly discussed. To reflect the theme of this book, eight topics—comprising regional integration, business regulations, Chinese investment and its influence in Africa, globalization, AGOA, foreign direct investment, and development—were purposely selected on account of being topical and relevant. This book is thus organized as follows. Chapter one, by John R. M. Philemon, prepares the ground for a healthy discussion on the influence of Chinese trade in Africa and of globalization, which are the two themes that run throughout the book. Philemon acknowledges, without taking sides, the existence of the two groups: those who support and those who oppose globalization. Kyung-il Ghymn, in chapter two, asks who is behind China’s export success. Since the 1980s China has been one of the most outstanding exporters of manufactured goods in the world. While he does not offer

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exhaustive answers to the question, the chapter gives a very detailed and plausible explanation for China’s export success. In chapter three, Humphrey P. B. Moshi assesses the impact of China on the economies of sub-Saharan Africa by focusing on opportunities, challenges and prospects. The author focuses on China’s increased competitiveness, its enhanced presence in the world market, and its impact on developing countries in particular, where its presence has become quite pronounced. Goodluck Charles and David Rwehikiza, both acknowledged researchers on business formalization, address in chapter four the pertinent issue of the regulation of the food-processing business, whose impact on its competitiveness has been ignored. The authors take Tanzania, Ghana and Rwanda as comparative cases to develop their position and arguments. They acknowledge that the degree of regulation in the food-processing sector is increasing because of universal concern about food safety and hygiene. In chapter five, Deusdedit A. Rwehumbiza focuses on the East African Community (EAC) and its influence on the intensity and competitiveness of Tanzania’s manufactured exports. His general objective is to analyze the influence of the newly established EAC on Tanzania’s manufactured exports to Kenya and Uganda. The author focuses mainly on the founder states because they are the ones that ratified the treaty establishing the EAC that entered into force on 7 July 2000, and mastered the Customs Union Protocol for several years before the accession of Rwanda and Burundi. Huruma L. Sigalla, in chapter six, discusses globalization and development as abstract social concepts that have been influenced by certain ideologies. Sigalla also presents the opinions of local actors and the findings of experts from public institutions dealing with issues pertaining to globalization, foreign direct investment and development in Tanzania. In chapter seven, Amina Akida focuses on the natural resources that Tanzania as a country could, amidst globalization, utilize to build its competitive advantage. Tanzania has been implementing trade liberalization policies since they were introduced in 1987. Since then, in the Tanzanian forestry sector, the trade (both domestic and foreign) in forest products has grown, characterized by its increased share of total trade. There has been an increase in the production, distribution and marketing of forest products in Tanzania. In addition, trade and investment liberalization policies in other sectors and a general change in economic activities have also influenced activities in forestry.

Introduction

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Ulingeta O. L. Mbamba addresses issues pertaining to the relationship between e-government status and global competitiveness in Tanzania in chapter eight. The author states that whilst many developing countries have invested significantly in a range of areas, more than 75 percent of the competitiveness of a country is predicted by its level of e-government. This implies that developing countries should invest in e-government in order to become competitive. In chapter nine, Wineaster Anderson and John R. M. Philemon discuss the opportunities and challenges represented by the African Growth and Opportunity Act (AGOA) towards Tanzanian firms. The authors note that since independence in 1961, Tanzania has faced economic development challenges that have impacted its ability to participate meaningfully in the multilateral trading system. Although the country is heavily dependent on agriculture, it has not been able to tap the agricultural opportunities presented by the AGOA through its agriculture or nascent manufacturing sector.

Challenges for the future This book addresses some of the topical issues relating to the potential of globalization and its actual and perceived negative consequences. Debate on these issues is ongoing and will continue to be fostered by UDBS in order to realize its motto of being the giver of knowledge for excellence. It is however worth noting that the conference from which the chapters of this book emanated, was generously supported by DANIDA under one of the three components of the BSPS Phase III. The component, implemented by UDBS and the Ministry of Industry, Trade and Marketing (MITM), supports the development of the human resources and institutional capacity that Tanzania needs in order to improve its participation in international markets. It is thus envisaged that the MITM’s capacity to manage international trade negotiations will be enhanced and that support will also be provided to develop the planning and management capacity of the MITM. Support for UDBS will result in the throughput of a higher number of students and trainees, and a more diverse menu of education and training in business management and international trade and business. The project was scheduled to run from 2008 to 2013, and thus these conferences and the subsequent publication of books and journal articles are some of the project’s deliverables. The School continues to strengthen its capacity and that of its staff to continue delivering the programmes that

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were undertaken during the last five years. Other collaborators and donors are invited to supplement these efforts.

References Chachage, C. S. L. and M. Mbilinyi, eds. 2003. Against Neoliberalism: Gender, Democracy and Development. Dar es Salaam: E & D Ltd. Chachage, C. S. L. 2004. “Globalization and Social Policy in Africa.” In Globalization and Social Policy in Africa, edited by Tade Akin Aina, Chachage Seithy L. Chachage and Elizabeth Annan-Yao. Dakar: CODESRIA. Chachage, C. 2009. “Globalization or Marginalization? The Place of Tanzania in the ‘Global Village.’” Paper Presented at the International Honors Program (IHP) on Rethinking Globalization. http://www.ihp.edu/ ILO. 2002. “ILO Tackles Social Consequences of Globalization.” Press release, 27 February. http://www.ilo.org/global/about-the-ilo/ newsroom/news/WCMS_007824/lang--en/index.htm Mbilinyi, M. 2009. “Economic Justice and Livelihoods of Marginalized Women in the context of the Global Economic Crisis and the Scramble for African Resources.” Plenary paper presented at TGNP Gender Festival, Dar es Salaam. Mkapa, B. 2004. “Statement By His Excellency Benjamin William Mkapa, President Of The United Republic Of Tanzania And Co-Chair Of The World Commission On The Social Dimension Of Globalization, Presenting The Commission Report To The Third Ordinary Session Of The Assembly Of The African Union, Addis Ababa, Ethiopia, 6 July 2004.” http://www.tanzania.go.tz/hotuba/ hotuba/040706_African_Union_-_Addis_Ababa.htm Mwapachu, J. V. 2005. Confronting New Realities: Reflecting on Tanzania’s Radical Transformation. Dar es Salaam: E & D Ltd. Ndulu, B. J. and L. Chakraborti. 2007. Challenges of African Growth. Washington, D.C.: World Bank. Nyerere, Julius K. 2004. “Education for Liberation” (1974). In Nyerere on Education / Nyerere Kuhusu Elimu, edited by Elieshi Lema, Marjorie Mbilinyi and Rakesh Rajani. Dar es Salaam: HakiElimu, E & D Ltd., and Mwalimu Nyerere Foundation.

CHAPTER TWO CHINA’S EXPORT SUCCESS: WHO’S BEHIND IT? KYUNG-IL GHYMN AND FAN LIU

Introduction China is the world’s second largest economy after the United States. It is the world’s fastest-growing major economy, with an average growth rate of 10 percent over the past thirty years. After more than twenty years of economic reform, China has become one of the most important destinations for cross-border direct investment. China is also the largest exporter and second largest importer of goods in the world. It became the world’s top manufacturer in 2011, surpassing the US. In 2010, foreign direct investment (FDI) in China exceeded US$100 billion for the first time, and investment overseas by Chinese companies in non-financial sectors totalled US$59 billion (Invest in China 2011). It is amazing how China has conquered the world with its various products. It seems that wherever you go, there is always a Chinese product at hand. Its overwhelming success in terms of gross earnings is matched by the diversity of its exports, which include electrical machinery and equipment, apparel, iron and steel, footwear and accessories, optics and medical equipment, furniture, toys and games, power generation equipment, leather and travel goods and plastics. Surprisingly, the US is the top destination for China’s exports, although China trades with many other countries as well, amongst them Hong Kong, Japan, South Korea, India, Singapore, Malaysia, Germany, and Taiwan (Ministry of Commerce 2011). The US is known for its insistence on strict compliance with standards, which means that to meet these standards product quality must be assured. Many people may wonder why China is so successful at exporting, but economic analysts had foreseen this a long time ago. China’s export structure has shown a rapid shift from labour-intensive industries to

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capital- and skill-intensive industries (Xu 2007). As China builds its technological capacity and skilled labour force, its exports are expected to become increasingly sophisticated. However, studies have found that the level of sophistication of China’s exports is already exceptionally high. Rodrik (2006) looked at the cross-country relationship between export success and per capita income and found that “China is an outlier in terms of the overall sophistication of its exports: its export bundle is that of a country with an income-per-capita level three times higher than China’s.” Why is China’s export success level so exceptionally high? Some believe that it is due to the size and nature of China’s trade in processed goods, which is a significant element in its foreign trade, accounting for 55 percent of China’s exports to the world in 2005 (Ferrantino et al. 2007). Branstetter and Lardy (2006: 662) pointed out that “China is able to export huge quantities of electronic and information technology products only because it imports most of the high value-added parts and components that go into these goods”. FDI is believed to be another important reason for China’s exceptionally high level of export success. Exports by foreign invested enterprises (FIEs) have accounted for more than half of Chinese exports since 2001 (Ferrantino et al., 2007). The FDI explanation is reinforced by the role of FIEs in China’s exports of processed goods, especially hightech ones. Branstetter and Lardy (2006: 38) noted that “most exports of electronic and information products are assembled not by Chinese-owned firms but by foreign firms that are using China as an export.” Given these strong arguments, it is important to investigate how the trade in processed goods and FDI have led to China’s export success. In this chapter, we trace the development of China’s economic policy regarding US–China trade, and its role as a major centre for global supply chains. We also explore FDI in China and the resulting changes in FDI inflows. Finally, we discuss the impact of FDI inflows on China’s export success, particularly after its formal accession to the World Trade Organization in December 2001.

US–China Trade China has become a global manufacturing centre and “Made in China” products are seen everywhere. About 95 percent of merchandise sold in the American stores Wal-Mart and Target are Chinese-made. High-end manufactured goods, sophisticated electronic products, consumer products, sporting goods, and even agricultural products find their way into every corner of the US market. It appears that Chinese marketers are

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performing so well that every product they export to the US market becomes a marketing success in a very short time, which raises a number of questions. Is China’s export success in the US market a result of Chinese manufacturing firms’ marketing efforts? Do they have a marketing and organizational function that generates and creates products? Do they have a system for communicating with and giving value to customers? If one looks at the impressive trade statistics, the answer would be a resounding “yes.” In the late 1970s, China began to adopt economic policies that were more market-oriented, and this shift has been very successful in promoting economic growth (Naughton 1996; Lardy 2002; Branstetter and Lardy 2006). Rising levels of industrial output have been accompanied by an increase in FDI inflows, leading many to conclude that this has played a major part in China’s success. Since China’s official entry into the WTO in 2001, its economy has continued to expand rapidly, FDI inflows have continued on a large scale, and its role in world trade has continued to increase. As China’s economy has expanded to become the second largest in the world, and as China’s geopolitical clout has grown commensurately, the US has sought to broaden the US–China relationship to encompass a wide range of global and regional issues. US–China trade expanded rapidly after the two nations re-established diplomatic relations in January 1979, signed a bilateral trade agreement in July of that year, and agreed mutual most-favoured-nation treatment beginning in 1980.,When China’s reforms began in 1979, the value of US–China trade (exports plus imports) was US$2 billion, and China was ranked the twenty-third largest US export market and the forty-fifth largest source of US imports (Morrison 2011). In remarks made in July 2009, President Obama* declared that partnership between the US and China was “a prerequisite for progress in many of the most pressing global challenges.” Continuing major bilateral issues in the relationship include trade and investment concerns (Lawrence and Lum 2011). In 2010, bilateral merchandise trade was US$457 billion; China was the US’s second largest trading partner (after Canada), the US’s third largest export market (after Canada and Mexico), and the largest source of US imports. In recent years, China has been one of the fastestgrowing markets for US exports, and the importance of this market is expected to grow even further, given the pace of China’s economic *

The White House Office of the Press Secretary, “Remarks by the President at the U.S./China Strategic and Economic Dialogue,” July 27, 2009, http://www.whitehouse.gov/the-press-office/remarks-president-uschina-strategicand-economic-dialogue.

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growth, and as Chinese living standards continue to improve and a sizable Chinese middle class emerges (USITC DataWeb 2011). Year 1980 1985 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US Exports 3.8 3.9 5.0 5.8 4.8 6.3 7.5 8.8 9.3 11.7 12.0 12.8 14.3 13.1 16.3 19.2 22.1 28.4 34.7 41.8 55.2 65.2 71.5 69.6 91.9

US Imports 1.1 3.9 8.5 12 15.2 19 25.7 31.5 38.8 45.6 51.5 62.6 71.2 81.8 100.1 102.3 125.2 152.4 196.7 243.5 287.8 321.5 337.8 296.4 364.9

US Trade Balance 2.7 0.0 -3.5 -6.2 -10.4 -12.7 -18.2 -22.7 -29.5 -33.9 -39.5 -49.8 -56.9 -68.7 -83.8 -83.1 -103.1 -124.0 -162.0 -201.7 -232.6 -256.3 -266.3 -226.8 -273.0

Table 2-1 US Merchandise Trade with China: 1980–2010 (US$ billions). Source : USITC DataWeb. The US trade deficit with China has widened over the past two decades, as US imports from China have grown much faster than US exports to China. That deficit rose from US$10 billion in 1990 to US$266 billion in 2008, fell to US$227 billion in 2009, and then rose to US$273 billion in 2010 (see Table 2-1 and Figure 2-1). As can be seen in Figure 2-2, the US trade deficit with China in 2009 was significantly larger than that with any other US trading partner and several trading groups. For example, it was

China’s Export Success: Who’s Behind It?

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larger than the combined US trade deficits with the Organization of Petroleum Exporting Countries, the twenty-seven nations of the European Union (EU), Mexico, Japan, and Canada (together totalling US$235 billion).

Figure 2-1 US Trade with China: 2000–2010. Source : USITC DataWeb.

Figure 2-2 US Trade with China: 2000–2010. Source : USITC DataWeb.

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China as a Major Centre for Global Supply Chains Many analysts contend that the sharp increase in US imports from China (and hence the growing bilateral trade imbalance) is largely the result of production facilities being moved from the US, Europe, and other (primarily Asian) countries to China. That is, various products that used to be made in such places as Japan, Taiwan, Hong Kong, Korea, and Singapore, and then exported to the US, are now being made in China (on behalf of foreign firms) and exported to the US. An illustration of this shift can be seen in Table 2-2, which lists US imports of computer equipment and parts from 2000 to 2010. For example, in 2000, Japan was the largest foreign supplier of US computer equipment (with a 19.6 percent share of total shipments), while China ranked fourth (with a 12.1 percent share). In just ten years, Japan’s ranking fell to number three, the value of its shipments dropped by 61.2 percent, and its share of US computer imports declined to 5.3 percent. China was by far the largest foreign supplier of computer equipment in 2010, with a 61.5 percent share of total US imports, compared with 12.1 percent in 2000 (see Figure 2-3). While US imports of computer equipment from China from 2000 to 2010 rose by 620.5 percent, the total value of US computer imports worldwide rose by only 41.9 percent. Many analysts contend that a large share of the increase in Chinese computer production and exports came from foreign computer companies that had moved their manufacturing facilities to China. For example, Taiwan, one of the world’s leaders in sales of information technology, produces over 90 percent of its information hardware, such as computers, in China.

Total China Mexico Japan Malaysia Singapore

2000 68.5 8.3 6.9 13.4 4.9 8.7

2002 62.3 12.0 7.9 8.1 7.1 7.1

2004 73.9 29.5 7.4 6.3 8.7 6.6

2006 83.8 40.0 6.6 6.3 11.1 5.6

2008 85.4 45.8 6.2 6.6 9.0 4.0

2010 97.2 59.8 13.6 5.2 3.0 3.6

2000–10 % change 41.9 620.5 97.1 -61.2 -38.8 -58.6

Table 2-2 US Merchandise Trade with China: 2000–2010 (US$ billions). Note: ranked according to top five suppliers in 2010. Source: USITC Trade DataWeb.

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70 60 Percent

50

39.8

40

57.5

61.5

29.1

30 20

45.2 47.8

51.5 53.7

12.0 13.8

19.1

10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year

Figure 2-3 Share of US Computer Imports from China: 2000–2010. Source : USITC DataWeb.

The Importance of FDI to China The early international economics literature suggests that FDI is a significant source of innovation and technology transfer (Findlay 1978; Mansfield and Romeo 1980). FDI not only injects capital into the domestic market but it also plays a central role in terms of technological spillover and the advancement of managerial skills. FDI is believed to carry with it new technologies and know-how not available in the host countries, where it has the potential to accelerate the adoption of technology and make production more efficient. A number of scholars have long recognized and argued that FDI is one of the main forces driving economic growth (Blomstrom et al. 1992). FDI is of particular importance to developing countries (Balasubramanyan et al. 1996) and to China in particular (Chen et al. 1995; Luo 1998; Wu 2000). It has been scientifically proven that FDI is more efficient than domestic investment in contributing to the economic growth of the host country. Blomstrom et al. (1992) found that FDI had a major effect on the economic growth of less developed countries. Findlay (1978) also postulated that FDI increases the rate of technical progress in the host country through the “contagion” effect from the more advanced technology, management practices, etc., used by foreign firms. Borensztein et al. (1998) found that FDI is an important vehicle for the

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transfer of technology, contributing to growth in larger measure than domestic investment. Since 1979 the continuing flow of FDI has had a pivotal role in China’s economic growth. Dees (1998) found that FDI affected China’s growth through the diffusion of ideas. A detailed review of the history of China’s economic development in relation to FDI and associated policies can be found in Chen et al. (1995) and Luo (1998). A few empirical studies have also explored the relationship between FDI and China’s intraindustry trade (for example, Hu and Ma 1999; Zhang et al. 2005). Essentially, those studies are based on aggregated FDI and cross-country analysis. However, the way in which FDI affects intra-industry trade depends largely on factors specific to the country as well as to the industry. For instance, domestic-market oriented FDI usually functions as a substitute for exports from the FDI source to host countries. Inflows of domestic-market oriented FDI reduce rather than increase trade between the FDI source and host countries. Until recently, inward FDI had been considered a critical factor among the many factors contributing to the sustained economic growth in China (Wei and Liu 2001; Whalley and Xin 2006; Tuan and Ng 2007; Yao and Wei 2007). Although inward FDI is believed to have had a positive and significant effect on economic growth, the exact mechanism of how FDI has impacted the development process is far from being understood (Yao and Wei 2007; Tuan and Ng 2007). The fascinating developments in China’s globalization also provide us with a tempting opportunity to study the role of inward FDI in the country’s economic growth. In this connection, the total factor productivity framework may provide us with an effective tool to measure production efficiency and, in addition, provide some evidence regarding the sources of economic growth in the context of FDI absorption. Since China began its economic reforms in the late 1978, it has gradually opened up to the rest of the world, with increasing FDI inflows and international trade. China received a cumulative total of US$10,305 billion in FDI during the last twenty-year period (1991–2010) and benefited tremendously from both tangible and intangible assets associated with FDI inflows. This strategy has been very successful. China’s exports grew rapidly, reaching US$1,600 billion in 2010. A look at Chinese export data by producer type reveals that FDI firms, both direct and joint ventures, have been a major contributor to the dramatic export expansion, accounting for almost 54 percent of China’s total trade.

China’s Export Success: Who’s Behind It?

15

FDI to China

in US$ 100 M 1,200 1,000 800 600 400 200

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

year

Figure 2-4 The FDI value in China from 1991 to 2010.

Figure 2-4 illustrates the annual trend of FDI from 1991 to 2010, during which there was dramatic expansion. Before 1979, China had been isolated from the rest of the world for more than thirty years. During this period, the FDI inflow was almost zero. Even in 1991, annual FDI into China was only US$4.4 billion. The first FDI boom occurred after 1991. It jumped to US$11 billion in 1992, more than triple that of 1991. This rapid growth continued and FDI reached the peak in 1998 of US$45.5 billion. One reason for the surge in FDI was Deng Xiaoping’s tour of the southern provinces in 1992, which encouraged local governments to open up further to foreign investors. This had the effect of accelerating China’s institutional reform towards economic integration with the world economy. Another important factor was the cumulative devaluation of the Chinese yuan from 1989 to 1994. The wealth and production cost effects associated with the devaluation reduced the relative cost of labour and intermediate inputs, and greatly enhanced China’s competitiveness in terms of FDI. Due to the Asian financial crisis in 1997–1998, which dampened the economic growth of China’s major FDI sources in Asian countries, FDI grew less than 1 percent in 1998 and declined in the following years. By

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2000, annual FDI inflows had shrunk to US$40.7 billion. Growth resumed momentum in 2001, however, and FDI rose to US$46.8 billion, 15 percent higher than in 2000. By 2010, a record high of US$105.7 billion was reached. The expansion of FDI after 2001 was driven mainly by official entry into the WTO in November 2001, upon which China committed itself to further trade liberalization by abolishing quotas, slashing tariffs, removing red tape and providing favourable treatment to foreign companies. Accession to the WTO led to the opening up of the banking, insurance and retailing sectors, thus stimulating further FDI inflows, in particular domestic-market oriented FDI.

Sources of FDI in China In recent years, many empirical studies have examined the factors influencing FDI flows to transition economies such as Central and Eastern European countries and China. The studies focusing on China tend to emphasize fundamental economic factors such as market size and labour and investment costs to attract FDI. In a study focusing on the drivers of FDI into China from 1978 to 1992, Wang and Swain (1995) found that GDP, wages and trade restrictions have a positive effect, while interest rates and exchange rates appear to have a negative effect on FDI. Similarly, Heid and Ries (1996) investigated the determinants of FDI location decision in fifty-four Chinese cities, and found that FDI is mostly attracted to Chinese cities that have a strong industrial base and excellent infrastructure. In another study, Sun et al. (2002) analyzed the determinants of FDI across China’s thirty provinces from 1986 to 1998 and found that the key drivers of FDI have changed over time. Hsiao and Hsiao (2004) also examined why China has attracted so much FDI and found that about 50 percent of China’s FDI came from Hong Kong and Taiwan, and Zhang (2005) asked why this was so. They found that the characteristics of FDI from the major developed nations (EU, US, and Japan) are different from those of Hong Kong and Taiwan. In addition, several studies have investigated other aspects of FDI in China. Some authors explored how FDI is a productive input spurring China’s recent economic growth (Chen et al. 1995; Wu 2000; Yao and Wei 2007). Based on the data, Hong Kong, the financial hub of South-east Asia, is the leading source of FDI for China. From 1992 to 2010, cumulative FDI from Hong Kong amounted to US$455.8 billion. Geographic proximity and the cultural linkage between the mainland and Hong Kong are the main reasons. These factors would generally reduce transaction

China’s Export Success: Who’s Behind It?

17

costs and lower asymmetric information barriers to investing in China. The large scale of “round-tripping” FDI between the mainland and Hong Kong also contributed to the exceptionally high FDI from Hong Kong. This refers to FDI originating from the mainland which is channelled to Hong Kong and then back to the mainland. Japan is China’s second largest contributor of FDI. From 1992 to 2010, Japanese multinational companies cumulatively invested US$70.2 billion. Japanese foreign direct investment (JFDI) outflows increased greatly during the 1980s as a result of the loss of competitiveness of Japanese products in export markets. This was a direct consequence of its appreciating currency due to the Plaza accord of 1985, which led to the near doubling of the value of the yen against the US dollar within two years (Cassidy and Andreosso-O’Callaghan 2006). JFDI into China became increasingly important, rising to 4.7 percent in the period from 1990 to 1995. Following a decline in the late 1990s, between 2001 and 2005 there was a relative upsurge in JFDI inflows into China. After it joined the WTO, the lucrative automobile market in China attracted a tide of FDI from Japan. Major Japanese car makers, such as Toyota, Honda and Nissan, accelerated their expansion into China, substantially increasing direct investment for the expansion of production to cater for the fast-growing local market (Xing 2007). Unfortunately, the period from 2005 and 2008 again showed a relative decline in JFDI inflows into China. The US is ranked third, with US$64.4 billion of cumulative FDI. The attention paid to China and its economic engagement with the rest of the world has led many to conclude that it is a leading destination for US FDI. Casual observers believe that China’s abundance of labour, high growth rate, and huge consumer market have attracted large amounts of US FDI. After the international unease generated by the Tiananmen Square incident dissipated, there was a sharp increase in FDI inflows and a pronounced diversification of its sources. It was during these years that Western countries and Japan began to enter the Chinese market in earnest. However, the role of American firms in these inflows has been and remains relatively modest (Branstetter and Lardy 2006). Taiwan emerged as the fourth largest FDI investor from 1992 to 2010 with US$59.8 billion. Taiwanese firms are motivated to locate their FDI in China because of their strong ethnic ties with the home country (Strange et al. 2009). This could be more salient for business groups because prior research shows that Taiwanese business groups are characterized by family and social networks (Chang et al. 2006). The second reason why Taiwan invests in China is because most Taiwanese firms have weaker firm-specific capabilities, such as technology and marketing, and thus it is

Chapter Two

18

more challenging for them to compete overseas on the basis of these capabilities. Business networks and social ties have been identified as key drivers for Taiwanese outward FDI (Chen and Chen 1998). In contrast to traditional FDI theory, which contends that firms engaging in FDI must be equipped with strong specific advantages, Taiwanese FDI in China provides a good opportunity for examining how weaker firms gain a competitive advantage in their internationalization strategies in an emerging market. Table 2-3 summarizes the four largest sources of FDI in China, from 1992 to 2010.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total

Hong Kong 750,707 1,727,475 1,966,544 2,006,037 2,067,732 2,063,200 1,850,836 1,636,305 1,549,998 1,670,000 1,780,000 1,770,000 1,899,830 1,794,879 2,023,292 2,770,342 4,103,640 5,399,800 6,747,400

Japan 70,983 132,410 207,529 310,846 367,935 432,647 340,036 297,308 291,585 430,000 420,000 505,400 545,157 652,977 459,806 358,922 365,235 411,700 424,200

US 51,105 206,312 249,080 308,301 344,333 323,915 389,844 421,586 438,389 443,300 542,400 419,900 394,095 306,123 286,509 261,623 294,434 357,600 405,200

Taiwan 105,050 313,859 339,104 316,155 347,484 328,939 291,521 259,870 229,658 290,000 390,000 337,700 311,749 215,171 213,583 177,437 189,868 656,300 670,100

45,578,017

7,024,676

6,444,049

5,983,548

Table 2-3 The Four Largest Sources of FDI in China, 1992–2010 (in US$10,000). Source : Invest in China.

China’s Export Success: Who’s Behind It?

19

FDI and Exports The competitive edge created by the pressure of international competition increases the productivity of the host country’s export sector. According to Porter (1990, 10), an improvement in productivity will be manifested either in the lower cost of capital utilization or in differentiated products that may command a higher price internationally. Lower costs mean a higher rate of return for foreign investors and so the gains generated by host country exports will attract inward FDI. The relationship between inward FDI and exports is explained in more detail in the literature, generally in the context of the complementarity or substitutability of exports and FDI. The essence of the argument was presented by Muchielli and Chedor (1999). Foreign investors in developing countries may have a better idea of what mix of host country export products will succeed in world markets. FDI brings with it international market knowledge and global distribution networks not necessarily available to local firms. FDI can create greater export potential and may alter a country’s export product mix over time. In these circumstances, inward FDI will lead to exports. The importance of the relationship between inward FDI and exports is central to development planning and strategies. If there is a definite unidirectional causality from export expansion to FDI (EXPĺFDI), then some credence is given to an export-led growth strategy. Exports not only stimulate economic development and structural change, but they also attract FDI into China. If this is so, then development planners can expect those regions of their domestic economies with a pre-existing export orientation to act as conduits for FDI. An appropriate policy in these circumstances is trade liberalization designed to reduce exporters’ costs and to encourage exports. The FDI that is encouraged by export expansion will stimulate overall development of the domestic economy. If the causative process is in the opposite direction (FDIĺEXP), then the implication is that the inflow of FDI is a prerequisite for the expansion of China’s exports. Thereafter, the appropriate development strategy would be to provide incentives for FDI, which in time would lead to export growth. This seems to have been the motivation for the establishment of the first special economic zones by China in 1979 (Zhang and Felmingham 2001). The export-led economic growth policy in place since 1981 in China was the major institutional change that led to the dramatic expansion of trade. In the process of implementing the export-led economic growth strategy, FDI has had a major role in promoting China’s exports. The lack

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of marketing channels, brand name recognition, capital and technology has made it difficult for Chinese exports to enter the world market, in particular the markets of industrialized countries. With the entry of multinational corporations (MNCs), which utilize China as a platform for exports, China has been integrated into global production chains. Combining the advantages of MNCs with technology, brand names and marketing networks, low-cost made-in-China products have been able to enter the world market and compete with products from other countries. The trade statistics suggest that the impressive growth in China’s exports over the last three decades has been mainly the result of export-oriented FDI. Even in the 1980s, the exports of firms invested in by foreigners were worth a mere US$0.3 billion. However, by 2010, these exports surged to US$862 billion. In 1998, the first year after the Asian financial crisis, exports of Chinese domestic firms decreased by 4.8 percent while those of firms invested in by foreigners grew by 8.1 percent. It was these latter firms which made the overall export growth positive. Without FDI, China’s export-led economic growth strategy would not have been as successful. Table 2-4 summarizes Chinese exports by MNCs, from 1992 to 2010. Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total export value 119 133 170 268 339 444 564 696 791 672 862 Table 2-4 Total Value of MNC Exports: 2000–2010 (in US$ billions).

Conclusion This chapter attempted to answer the question of who lies behind China’s export success. One can easily assume that there must be an excellent marketing strategy so that products made in China find no global market barriers and are able to cross all national boundaries. Even in Japan, whose consumers are obsessed with quality, people find that electronic goods made by Sony, Panasonic and Toshiba, the pride of Japanese brands and once considered examples of “monozukuri,” the Japanese art of manufacturing, are sold in the streets of Akihabara with the mark of country of origin: Made in China. Despite its outstanding export performance, a close examination of the Chinese export industry reveals that its marketing functions are severely limited. Most of the marketing functions, except the initial product

China’s Export Success: Who’s Behind It?

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development process, are carried out by MNC executives, joint venture firms and foreign buyers. They seem to make the main decisions concerning promotion, pricing and distribution, and of course they bear the risks associated with the overseas marketing operations. Another factor determining China’s export success has been FDI. China received a cumulative total of US$10,305 billion in FDI during the last twenty years (from 1991 to 2010). The strategy has been very successful. With this FDI inflow, China’s exports grew rapidly and reached US$862 billion in 2010. A look at Chinese export data by producer type reveals that FDI firms, both direct and joint ventures, have been the major contributor to dramatic export expansion. They accounted for almost 54 percent of China’s total trade. In contrast to Japan and Korea, whose export success reflects their aggressive global marketing efforts, Chinese export marketing efforts appear very limited and foreign dependent. Japanese and Korean companies, for example, design their own products and brands and spend heavily to develop and promote brand names and control their own marketing. Very few Chinese companies promote and export their products overseas. As a result of this passive marketing, Chinese exportled economic growth may face a severe test in terms of future economic development. In fact, many experts view the model behind China’s success, led by exports and foreign investment, as increasingly unsustainable (Anderlini 2011). From the discussion above, it can be concluded that the major actors involved in China’s successful export performance appear to be three entities: first, the Chinese government itself (with its export-led economic development policies), second, the “visiting foreign buyers” who buy lowpriced products, and third, FDI on the part of MNCs, the “foreign jointventure firms” who are setting up factories in China for export purposes. Thousands of foreign purchasing agents and brokers and hundreds of MNC executives visit China from all over the world to seek out lowerpriced products, and most of the required marketing functions are performed by foreign business people doing business in China.

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References Anderlini, Faimil. 2010. “A Workshop on the Wane.” Financial Times, October 17. Balasubramanyan, V. N., M. Salisu, and D. Sapsford. 1996. “Foreign direct investment and growth in EP and IS countries.” Economic Journal 106: 92–105. Blomstrom, M., R. Lipsey, and M. Zejan. 1992. What Explains Developing Country Growth. NBER Working Paper no. 4132. Cambridge, MA: National Bureau of Economic Research. Borensztein, E., J. De Gregorio, and J.-W. Lee. 1998. “How does foreign direct investment affect economic growth?” Journal of International Economics 45: 115–135. Branstetter, L. and N. Lardy. 2006. China’s embrace of globalization. NBER Working Paper No. 12373. Cambridge, MA: National Bureau of Economic Research. Cassidy, J. F. and B. Andreosso-O’Callaghan. 2006. “Spatial determinants of Japanese FDI in China.” Japan and the World Economy 18: 512– 527. Chang, S.-J., C.-N. Chung, and I. P. Mahmood. 2006. “When and how does business group affiliation promote firm innovation? A tale of two emerging economies.” Organization Science 17 (5): 637–656. Chen, C., L. Chang, and Y. Zhang. 1995. “The role of foreign direct investment in China’s Post-1978 economic development.” World Development 23: 691–703. Chen, H., and T.-J. Chen. 1998. “Network linkages and location choice in foreign direct investment.” Journal of International Business Studies 29 (3): 445–467. Ferrantino, M., R. Koopman, Z. Wang, F. Yinug, L. Chen, F. Qu, et al. 2007. Classi¿cation and statistical reconciliation of trade in advanced technology products: The cases of China and the United States. Working Paper Series No. WP20 070906EN, Brookings-Tsinghua Center For Public Policy. Findlay, R. 1978. “Relative backwardness, direct foreign investment, and the transfer of technology: a simple dynamic model.” Quarterly Journal of Economics 92: 1–16. Heid, K. and J. Ries. 1996. “Inter-city competition for foreign investment: static and dynamic effects of China’s incentive areas.” Journal of Urban Economics 40: 38–60.

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Hsiao, Mei-Chu W. and Frank S. T. Hsiao. 2004. “The chaotic attractor of foreign direct investment—Why China? A panel data analysis.” Journal of Asian Economics 15: 641–670. Hu, X. and Y. Ma. 1999. “International intra-industry trade of China.” Review of World Economics 135: 82–101. Invest in China. 2011. FDI Statistics. http://www.fdi.gov.cn/pub/FDI_EN /Statistics/FDIStatistics/ default.htm Lardy, N. 2002. Integrating China into the global economy. Washington, DC: Brookings Institution Press. Lawrence, S. V. and T. Lum. 2011. US–China relations: policy issues (Report No. R41108). Washington, DC: Congressional Research Service. Luo, Y. 1998. International Investment Strategies in the People’s Republic of China. Aldershot: Ashgate. Mansfield, E. and A. Romeo. 1980. “Technology transfer to overseas subsidaries based firms.” Quarterly Journal of Economics, 95, 737– 750. Ministry of Commerce (MOC). 2011. Regional trade statistics. http://english.mofcom.gov.cn/ lanmubb/lanmubb.html. Morrison, W. M. 2011. China–US trade issues (Report No. RL33536). Washington, DC: Congressional Research Service. Mucchielli, J. L. and S. Chedor. 1999. “Foreign direct investment, export performance and the impact on home employment: an empirical analysis of French firms.” In New horizons in international business, edited by S. G. Lee and P.-B. Ruffini. Cheltenham: Edward Elgar. Naughton, B. 1996. “China’s emergence and prospects as a trading nation.” Brookings Papers on Economic Activity 2: 273–343. Porter, M. E. 1990. The competitive advantage of nations. London: Macmillan. Rodrik , D. 2006. “What is so special about China’s exports?” China and World Economy 14 (5): 1–19. Strange, R., I. Filatotchev, Y. C. Lien, and J. Piesse. 2009. “Insider control and the FDI location decision.” Management International Review 49 (4): 433–454. Sun, Qian, Wilson Tong, and Qiao Yu. 2002. “Determinants of foreign direct investment across China.” Journal of International Money and Finance 21: 79–113. Tuan, C. and L. F. Y. Ng. 2007. “The Place of FDI in China’s Regional Economic Development: Emergence of the Globalized Delta Economies.” Journal of Asian Economics 18: 348–364.

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US International Trade Commission (USITC) DataWeb. 2011. Trade Data Report 2010. http://dataweb.usitc.gov/ Wang, Zhen Q. and Nigel J. Swain. 1995. “The determinants of foreign direct investment in transforming economies: evidence from Hungary and China.” Weltwirtschaftsliches Archiv 131: 359–382. Wei, Y. and X. Liu. 2001. Foreign direct investment in China: Determinants and impact. Cheltenham: Edward Elgar. Whalley, J. and X. Xin. 2006. China’s FDI and non-FDI economies and the sustainability of future high Chinese growth. NBER Working Paper no. 12249, Cambridge, MA: National Bureau of Economic Research. Wu, Y. 2000. “Measuring the performance of foreign direct investment: a case study of China.” Economic Letters 66: 143–150. Xing, Yuqing. 2007. “Foreign direct investment and China’s bilateral intra-industry trade with Japan and the US.” Journal of Asian Economics 18: 685–700. Xu, B. 2007. Measuring China’s export sophistication. Working paper, China Europe International Business School. Shanghai: CEIBS. Yao, S. J. and K. L. Wei. 2007. “Economic growth in the presence of FDI: The perspective of newly industrializing economies.” Journal of Comparative Economics 35: 211–234. Zhang, J., A. Witteloostuijn, and C. Zhou. 2005. “Chinese bilateral intraindustry trade: A panel data study for 50 countries in the 1992–2001.” Review of World Economics 141: 511–540. Zhang, Kevin H. 2005. “Why does so much FDI from Hong Kong and Taiwan go to mainland China?” China Economic Review 16: 293–307. Zhang, Q. and B. Felmingham. 2001. “The relationship between inward direct foreign investment and China’s provincial export trade.” China Economic Review 12: 82–99.

CHAPTER THREE THE IMPACT OF CHINA ON THE ECONOMIES OF SUB-SAHARAN AFRICA: OPPORTUNITIES, CHALLENGES AND PROSPECTS HUMPHREY P. B. MOSHI

Introduction China’s position as an economic powerhouse in the global economy is causing concern and attracting attention at both the academic and policy making level. China’s rapid growth and increased openness over the past quarter of a century has led to its emergence as a key player in the global economy in the early twenty-first century. China’s GDP has grown by over 9 percent per annum over the past two decades, and the OECD (2005) predicts that China will become the fourth largest economy in the world during the next five years. Its share of world trade has risen from less than 1 percent in 1980 to almost 6 percent in 2003, making it the fourth largest trading economy. The increased competitiveness of China and its enhanced presence in the world market is having a major impact on both developed and developing countries. This is especially the case of Africa in general and Sub-Saharan Africa (SSA) in particular, where the presence of China has become quite pronounced. Since the establishment of the Forum for Chinese–African Cooperation (FOCAC) in 2000, China has become one of the most significant actors on the African continent. The volume of trade has increased more than fourfold since 2000 and this year it is estimated that, for the first time, it will exceed the US$50 billion mark. In this regard, China is already Africa’s third most important trading partner, after the USA and France. Africa exports primarily raw materials, particularly crude oil—about 30 percent of Chinese oil imports come from Africa—and unprocessed

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metals, while processed consumer goods such as clothing, plastic products and electrical goods are imported from China. This asymmetric relationship needs to be seriously addressed by according priority to the aspect of adding value to Africa’s exports as a strategy for tackling the continent’s core problem of abject poverty.

Theoretical Framework Currently, there is no coherent theory guiding Sino-African relations. However, over time assumptions and hypotheses have evolved, which have aimed at analyzing the relationship. In this section we revisit some of the explanations for China’s rapid expansion into the SSA economies. One school of thought argues that China’s expansion into Africa is underpinned by the construction of strong bilateral relations between Beijing and African regimes, contrary to the principle of multilateralism, as advocated by both the G7 and OECD countries. This bilateralism seems to be beneficial to African governments because it enhances their scope to manoeuvre (Melber 2009). However, Chinese foreign policy in Africa, with its emphasis on the sovereignty of governments and non-interference, is seen as an instrument for promoting autocratic leaders and oligarchies that continue to rule in the majority of African countries, especially those in possession of vast natural resources (Chang and Halliday 2006). The non-interference issue has been debated hotly in Western countries, to the extent that Chinese aid to Africa has been characterized as “doing more harm than good” because of its failure to match the conditions placed on aid by other countries, including evidence of good governance, respect for human rights and spending directed at alleviating poverty (McGreal 2007). The other school of thought is underpinned by the spirit of “South– South” cooperation, guided by the principle of equality and solidarity. The main argument is that countries of the South should mobilize resources for development among themselves rather than relying on donor countries. It is thus assumed that such mobilization of resources would ensure that a more balanced and equitable global order would be achieved, whereby the development and advancement of the people in both China and Africa would be prioritized (Fernandez-Taranco 2008). It is in this context that, from the time of the Bandung Conference of 1954 onwards, China assumed a hegemonic role in the South, later stoked by Sino-Soviet rivalry, which was founded on a necessarily proactive, interventionist role in African countries (Chang and Halliday 2006). The message which emerges from the South–South debate is that China is seen as an

The Impact of China on the Economies of Sub-Saharan Africa

27

alternative to imperialist and neo-Western interests aimed at fostering Africa’s development. The third school tends to view Chinese penetration as another face of capitalism, motivated by self-interest similar to Western involvement (Melber 2009). The penetration is seen as being not only motivated by the scramble for markets but also by China’s need to position itself as a competitor for increasingly scarce resources (particularly fossil fuels). According to this argument, it is no wonder, therefore, that (neo-) mercantilist aspects figure prominently in China’s intensified relations with a number of politically crucial producer countries in Africa, Central Asia and the Middle East (Giessmann 2006). The above concerns and criticisms notwithstanding, the expansion of Chinese interests into Africa and elsewhere is at the end of the day informed by China’s foreign policy which, among other things, aims at achieving the following goals: first, to preserve a peaceful environment for continued economic growth and the prosperity of Chinese society; second, to support an economic development that promotes political stability both within China and on its periphery; and third, to guarantee unhindered access to resources, in particular as regards energy and raw materials.

Sub-Saharan Economic Developments Whereas SSA countries’ growth rate was about 5 percent over the past four years, China’s annual growth rate was 8.4 percent. The modest growth in SSA countries explains why extreme poverty has increased, given that half of the population is living below the poverty line (IMF 2006a). This poor growth rate casts doubt on their ability to achieve the Millennium Development Goals (MDGs) of halving extreme poverty by 2015. However, it needs to be pointed out that economic growth in SSA has accelerated, unlike what happened in the 1990s. This trend has been attributed mainly to the favourable performance of primary products, including oil and gas, on the world market in recent years, which is to a large extent a result of China’s increased demand for such products. China is currently the world’s main consumer of iron ore, manganese and chromium. China’s imports of energy and other raw materials have also greatly increased in the last twenty years. It is further claimed that given the higher standard of living in China, the demand for products such as soya beans, cotton, wood and meat products has been on the rise. For example, 40 percent of the world’s soya bean exports are directed at China (Kreft 2007).

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Other macroeconomic indicators also show that SSA underperforms relative to China, and its inflation rate is higher than China’s. Moreover, while the latter recorded a positive current account balance over the period, SSA showed an increasing deficit (with the exception of oilexporting countries, whose current account balances have been positive since 2003, due largely to recent increases in the price of oil). Asia’s trade performance has been impressive with respect to the export of manufactured goods. Its share of global exports increased from 18 percent in 1980 to 22 percent in 2000, while its share of all developing countries’ exports increased from 60 to 72 percent over the same period. Similarly, its share of global trade in manufactured goods increased threefold, reaching 21.5 percent in 2000. Asia’s total exports recorded an annual growth rate of 7 percent on average over the period under review, compared with a mere 1.1 percent for Africa and 1.3 percent for SSA. While Asia’s non-fuel exports increased by 5 percent per year, those of Africa and SSA rose by only 0.6 and 0.4 percent respectively. SSA recorded the worst performance in terms of the annual growth rate of exports of fuel and non-fuel primary products and manufactured goods (Bamou 2007). The above review of the recent performance of SSA and China, and to some extent Asia, shows clearly that the two regions face different challenges. In order to achieve the MDGs, SSA needs to accelerate its growth rate, because only by doing so over a long period of time will the continent escape from the poverty trap (Sachs et al. 2004). For this to happen there is a need to step up progress by putting in place a policy environment that is conducive to strong economic growth. However, such an environment needs to be complemented by an enabling regional and global socio-economic and political environment that is supportive of Africa’s development efforts.

Impact Assessment There are several channels through which Chinese activities will affect the development process in SSA. At the FOCAC summit in 2006, two documents were adopted by the participants: The Beijing Declaration and The Action Plan 2007–2008. Both documents were unanimously hailed by the parties, fifty years after the commencement of diplomatic relations between China and Africa, as “historical milestones” and as a manifesto for “a new kind of strategic partnership.” The agreements embodied in the documents include a comprehensive package of concrete investment, development and commitments on the part of the Chinese over the next

The Impact of China on the Economies of Sub-Saharan Africa

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three years, including a favourable loan of US$3 billion, preferential credit for the purchase of Chinese goods to the value of US$2 billion, and the doubling of Chinese development aid by 2009. Furthermore, within the framework of the second Chinese–African Entrepreneurs Conference, the Chinese–African Chamber of Trade was set up and investment agreements with eleven African States, to the tune of US$1.9 billion, were concluded (Hofmann et al. 2007). In the context of the foregoing, it is clear that there will be three main channels of impact: trade, foreign direct investment (FDI), and aid. We are aware of other channels, including migration, governance, and the environment, but for now we focus our attention on the former categories and assess their impact.

Trade Traditionally, African economies have had strong trade and economic relations with European countries. In contrast, exports to Asia are small in number, but it has become an increasingly important market for Africa in recent times. Africa’s exports to Asia grew significantly in both relative and absolute terms during the past twelve years. Of Africa’s total export earnings, which amount to about US$134 billion per year, exports to Asia grew by 10.3 percent in the period 1991–2003, surpassing intra-Africa trade, which grew by 7 percent over the same period. On the Asia side, apart from intra-Asia imports, which grew by 7.9 percent between 1991 and 2003, imports from Africa averaged 7.5 percent, compared with 4.7 percent and 2.9 percent from the EU and USA, respectively. According to Bamou (2007), a major factor accounting for the rising share of Asia’s trade with Africa is the influence of China and India. SinoAfrican trade, in particular, has grown tremendously. It grew by 700 percent during the 1990s. Between 2002 and 2003, trade between China and Africa doubled to US$18.5 billion, and then nearly doubled again in the first ten months of 2005 to US$32.17 billion. Most of the growth was due to China’s increased imports of oil from Sudan and other African nations. China is now the continent’s third most important trading partner, behind the US and France and ahead of Britain. The trade relationship between the two parties is based on a number of mutually beneficial factors. On the African side, China is more acceptable because of its policy of non-interference in the internal affairs of other states. Therefore, loans or aid are not subject to political conditions, as is often the case with Western countries.

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Trade relations between China and SSA will have both direct and indirect impacts on the economies of the latter countries. The direct impacts range from increased export volume and cost of certain raw materials, to the availability of Chinese products which are accessible to a broad spectrum of consumers. How this will impact poverty remains controversial. Nonetheless, the growth of exports could have a positive impact in terms of reducing poverty, if it is translated into greater investment, capacity utilization and expanded output, which will result in an increase in per capita income. Apart from what appear to be possible positive impacts, one should not lose sight of the fact that while most exports from SSA to China are primary commodities, exports from China are manufactured goods. This pattern of trade may cause African countries to place emphasis on specializing in primary commodities, which give short-term benefits but can end up creating long-term problems. The pressure on domestic manufactured goods through competition can counterbalance the positive effect of the supply of cheap goods, and may stifle industrialization in African countries. This competition represents a significant threat to African producers and exporters, both in the domestic market and third country markets. In particular, the impact on African, US and EU markets of Chinese exports might be far-reaching as far as commodities like textiles and garments are concerned. We sum up this section on the impact of China’s trade with SSA by emphasizing three dimensions of the impact (Qureshi and Wan 2006): first, the complementarity effect, which is the growth of exports from China to African countries due to increased demand; second, the international competitive effect, which refers to increased competition from China with regard to exports to other markets; and third, the domestic competitive effect, due to increased competition from China in the domestic market.

Foreign Direct Investment Africa’s share of world FDI inflows is extremely low. By the second half of the 1990s, the average share of FDI in the GDP of African countries was not only very small but also declining. Any positive trends were largely related to investment in countries with newly discovered resources. For instance, in 1996, FDI was a mere US$5.5 billion, representing only 1.5 percent of global investment flows. Its distribution was extremely skewed, with Nigeria, Egypt, Morocco, Tunisia, South Africa, Algeria, Angola, Ghana and Cote d’Ivoire accounting for over 67

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percent of FDI in Africa. Between 1991 and 1996 ten countries (the former plus Tanzania, Namibia, Uganda and Zambia) received almost 90 percent of the flows, with Nigeria alone absorbing a third (Geda 2007). In analyzing the issue of FDI, especially in the African context, it is important to focus on the motives behind the flows, one of which is the acquisition of natural resources, which is likely to bring its own impact. According to Goldstein et al. (2006) this impact is likely to be experienced through four channels: first, direct competition for FDI (or what is commonly known as FDI crowding-out from China); second, indirectly because the price of commodities rises; third, Chinese multinationals investing in Africa; and fourth, opportunities for African FDI in China and India. In discussing the crowding-out effect, it is stressed that although FDI in SSA is geared toward resource extraction (resource-seeking) and the domestic market (market-seeking), China does not pose a direct (and significant) threat to Africa. In relation to the more indirect channel, Goldstein (2006, 54–5) argues that commodity booms, partly fuelled by Chinese and Indian demand, are making Africa more attractive to “resource and raw-material-seeking” FDI. The implication of the above for African countries is that their aspirations to industrialize may not be realized or may have to be postponed, and market-seeking FDI will continue to shun places in the short and medium term. This will be the case as long as China can maintain its competitive edge in low technology industries, unless the preferential market access granted by developed countries (through initiatives such as Everything But Arms (EBA) and the AGOA), tariffjumping FDI, and proximity to rich economies overturn the cost disadvantages of countries in Africa. Nevertheless, the picture might look very different in the long term. The pace at which China is changing the technological structure of its production and exports, the rising costs of export-oriented production, Africa’s proximity to European and Middle Eastern consumer markets and a host of other factors might help Africa to become a success story in the long run. Indeed, Asian countries are increasingly providing essential inputs (and components) for Africa’s growing manufacturing sector, most notably its textile and apparel sectors, and in some cases, its automobile sector (World Bank 2004). The World Bank study (2004) observes three possible forms of Asian investment in Africa: investment aimed at supplying Asia with natural resources and processed raw materials; investment that targets the African domestic market, which could be boosted via effective regional integration;

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and investment aimed at supplying international markets, such as the EU and US, motivated mostly by the low cost of labour, with African countries being given favourable terms of trade and access to those markets. To sum up, it should be borne in mind that, first, China is highly unlikely to divert FDI that would otherwise come to Africa. Second, the level of FDI from China is not only very small, but is located in a few countries. Third, these flows from China are largely motivated by the desire to secure sources of energy and raw materials, as well as the desire to exploit preferential markets which are accessible to African countries. To gain a deeper insight into the impact of FDI on receiving countries, future studies need to focus on indicators like technology transfer, employment creation, and the threat of competition to local producers, as well as on the locking of African countries into primary commodity production.

Development Aid The foregoing sections clearly indicate that China has become a significant economic partner for Africa. At the same time, it has become “an important new and obliging donor” (Hofmann et al. 2007, 83). As a donor, China has carefully aligned its foreign policy to its domestic development strategy. That is why Chinese state-controlled companies are encouraged to seek out exploration and supply contracts with countries that produce oil and gas, and why China aggressively courts the governments of those countries with diplomacy, trade deals, debt forgiveness and packages. It is hard to get accurate and systematic figures of China’s total amount of aid to SSA countries. Only in 2002 was it reported that China offered US$1.8 billion to a number of SSA countries. Since that year no comparable information has been publicly available (Alden 2005). However, it would seem that current aid flows are still far well below the amounts provided by OECD agencies. China’s relations and aid flows with African countries are longstanding and have evolved significantly over the past thirty years. After the 1955 Bandung Conference, China pledged to support Liberation Movements and to gather support to isolate Taiwan (Taylor 1998). It is indeed extraordinary that China, being a developing country, has been able to offer substantial amounts of aid since 1960 and before the more recent surge in Chinese cooperation (Brautigam 1997). Overall, since mid-2005, SSA countries have received financial assistance from the Chinese government for over 800 key projects, such as

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the famous 1,860 kilometre TAZARA railway linking Zambia and Tanzania in the early 1970s (Kaplisky et al. 2006). Over the last few years, during which time China’s economic and diplomatic presence in SSA has been significantly strengthened, its development assistance to African countries has become more sophisticated and developmental, even if “China’s growing aid programme appears to be closely related to its need for traded commodities” (Kaplinsky et al. 2007). China’s close cooperation with Africa is increasingly attracting the attention of the international community, particularly Europe. The main criticism of Western industrialized countries is that China does not impose conditions when giving loans and aid. In contrast to other donor countries, China imposes no conditions on the recipient country regarding criteria such as good governance or social and environmental standards (Hofmann, et al 2007). With such a policy stance China supports countries like Zimbabwe and Sudan, which have had sanctions imposed on them by the international community. Apart from the “liberal governance criticism” and skepticism, China’s involvement in Africa is evaluated positively. It is now widely accepted that China contributed positively to the economic growth of Africa by over 5 percent in 2005 as well as to improvements in infrastructure. In principle, the traditional donors appreciate the fact that China has taken on the responsibility. In particular, China’s commitment to strengthening multilateralism is held in high esteem. For example, the International Poverty Reduction Center, founded together with UNDP in 2005 with the objective of promoting dialogue between China and other developing countries, is being positively rated by the international community. It is important to note that China’s aid to Africa accompanies trade and FDI; and it is widely spread, in that it covers a broad spectrum of sectors. For example, it includes infrastructural projects like roads, bridges, dams and pipelines. It also involves the construction of sports stadiums, the sending of teachers and donors to host countries, and the provision of lowcost housing and training scholarships. This broad-based aid clearly shows that it is directed at the wider strategic objective of the socio-economic development of the recipient countries. To sum up, there are five main potential advantages of Chinese aid: (1) it targets important infrastructure projects with long maturity and longterm potential (with no hurry for disbursements); (2) there is less bureaucracy and fewer transaction costs; (3) it is more efficient, costs less and is faster; (4) it exposes the recipient countries to the Chinese culture of hard work and modest lifestyle (if these traits were to be emulated, it would curb conspicuous spending and laziness, and promote the culture of

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saving in the host countries); (5) it provides more policy space (with few conditions attached) and increases bargaining power vis-à-vis other donors. More importantly, here we argue that enhanced aid from China, and eventually other countries like India, may provide the opportunity for broadening the policy space of those governments that aim to redirect their policy frameworks towards the gradual establishment of development states, or simply to look for room for manoeuvre to design and implement policies that would not be supported by the Western Aid Consensus.

Concluding Remarks and Lessons Learned The Chinese model presents a number of lessons which could be learned and adapted to the African environment. The idea here is not to replicate the model, but rather to extract specific lessons from China’s experience that may be relevant to the common and at the same time diverse circumstances of many African countries. These lessons could involve institutional change, specific industrial and trade policy measures, mechanisms for attracting FDI with greater development potential, devising more effective “reciprocal control mechanisms” between states and business, and enhancing bargaining power vis-à-vis other major donors (Oya 2006). China has sustained a high economic growth rate for over two decades, driven by increased investment, which reached more than 40 percent of GDP. Sustainable and pro-poor growth enabled China to lift half of its population out of extreme poverty between 1980 and 2000. This shows clearly that a high and sustainable growth rate is critical for reducing poverty. However, this impressive performance has been attained without adhering to the Washington Consensus doctrine. Indeed, policies in China differ fundamentally from those of the World Bank and IMF, but in spite of this, China has done tremendously well. The main lesson to be learnt here is that African states have to appreciate the fact that there is an alternative path to socio-economic development, contrary to the usual neoliberal doctrine. Therefore, African countries need to learn from the experience of the Asian drivers and adapt some of these lessons to their own conditions as a way of avoiding or distancing themselves from the policy-merchandising and bullying of international financial institutions and other donors. One of the strategies for adopting and adapting the Chinese model is to ensure that Chinese experts take part in the continent’s formulation of development policies and strategies. This level of engagement is currently

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conspicuously missing in the Africa–China relationship. It is true that the Chinese are found almost everywhere (on construction sites, in shops, on farms, in factories, and on the streets selling commodities). However, their presence is not visible in the “corridors of power,” that is, in the offices of the key ministries of finance, planning, industry and agriculture. China’s experience of development provides a basis for African countries to ask development partners for more policy space than is the case at present. Policy space is understood as “room for manoeuvre” in policy making that refers to the different types of policies and policy options available to the government. We are of the opinion that the great dependence on donors has shrunk the policy space of most African governments. In other words, much of the aid from Western donors not only comes with high transaction costs and sometimes significant ties, but also with a strong ideological agenda, which may vary across donors in terms of emphasis, but which can ultimately shape policy decisions and processes. Indeed, the narrow policy space tends to promote adoption while downplaying the important aspect of adaptation to the local environment and conditions. Ultimately, this undermines ownership of the development agenda by the aid-dependent country. Chang (2006) is of the opinion that in many developing countries, but particularly in Africa, aid flows have become a vehicle for the shrinkage of policy space. This being the case, it is important for African countries to strengthen economic ties with the Asian drivers, not only as a way of broadening the policy space, but also as a means of pressurizing Western countries to ease the conditions they impose on African governments. Furthermore, the relative resilience of China and other high-performing Asian economies to the recent global economic crisis provides yet another opportunity for African policy makers to revisit the debate on the efficacy of the neo-liberal development paradigm in the context of the continent’s quest for sustainable socio-economic development and poverty alleviation (Moshi 2008). Whatever the true motive behind China’s intention of “helping” SSA countries with grants, extremely concessional loans, and technical assistance in relevant domains, the fact is that its presence is providing an alternative to governments currently locked into the tight conditionality frameworks imposed by donors from developed countries. China and India are becoming significant actors in global governance, and are fundamentally changing the world’s economy and politics. Indeed, the activities of these countries will have a profound impact on the economies of African countries. Whether their impact, through the channels of trade, FDI and aid, is positive or negative, it is important for

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African countries, as a bloc or individually, to craft a strategy for engaging with China. The main objective of such a strategy should be that of ensuring that China’s trade, FDI, development aid potential and policy rethinking is effectively exploited to support and complement growth and poverty reduction initiatives in African countries. We would like to underscore the fact that, without such a strategy, Africa will fail to benefit from its socio-economic and trade relations with China, and the reduction of poverty in Sub-Saharan Africa will not be realized.

References Alden, C. 2005. “China in Africa” Survival 47 (3), 147–164. Bamou, Ernest and Adeola Adenikinju. 2007. Evaluating Asian Drivers Impacts on Sub-Saharan Africa Oil and Gas Industries: A Methodological Framework. Nairobi: AERC. Chang, H. J. 2006. “Policy Space in Historical Perspective with Special Reference to Trade and Industrial Policies.” Economic and Political Weekly, 627–633. Chang, J. and J. Halliday. 2006. Mao: The Unknown Story. Cambridge: Cambridge University Press. Fernandez-Taranco, Oscar. 2008. “China Africa Business Forum: Statement by UN Resident Coordinator and UNDP Resident Representative.” Ngurdoto Mountain Lodge, Arusha, Tanzania, 28–29 April. Geda, Alemayehu. 2007. “Impact of China and India on Africa: Trade, FDI and the African Manufacturing Sector.” Mimeo. Giessman, Hans. 2006. “New Powers for Global Change: China’s Role in the Emerging World Order.” Dialogue on Globalisation, Berlin. Hofmann, K., et al. 2007. “Contrasting Perceptions: Chinese, African, and European Perspectives on the China–Africa Summit.” Internationale Politik und Gesellschaft 2, 76–90. IMF. 2006. World Economic Outlook: Globalisation and Inflation. Washington, D.C.: IMF. Kaplinsky, Raphael, Dorothy McCormick, and Mike Morris. 2007. The impact of China on sub-Saharan Africa. Institute of Development Studies, University of Sussex. Kreft, H. 2007. “China’s Policy of Securing Energy and Raw Materials as a Challenge for the West.” Internationale Politik und Gesellschaft 2:46–61. McGreal, Chris. 2007. “Chinese Aid to Africa May Do More Harm and Good: Special Report on China.” The Guardian, 8 February.

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Melber, Henning. 2009. “Global Trade Regimes and Multi-Polarity: The us and Chinese Scramble for African Resources and Markets.” In A New Scramble? Imperialism and Development in Africa, edited by Roger Southall and Henning Melber. Durban: UKZN Press. Moshi, Humphrey P. B. 2008. The Global Financial Crisis: Challenges and Opportunities. Dar es Salaam. Oya, Charles. 2006. The Political Economy of Development Aid as Main Source of Foreign Finance for Poor African Countries: Loss of Policy Space and Possible Alternatives from East Asia. London: SOAS. Qureshi, M.S. and G. Wan. 2006. “Trade Potential of China and India: Threat or Opportunity.” Mimeo. Sachs, Jeffrey, John W. McArthur, Guido Schmidt-Traub, Margaret Kruk, Chandrika Bahadur, Michael Faye, and Gordon McCord. 2004. “Ending Africa's poverty trap.” Brookings papers on economic activity 1:117–240. Taylor, I. 1998. “China’s Foreign Policy Towards Africa in the 1990s.” Journal of Modern African Studies 36 (3): 443–460. World Bank. 2004. “Patterns of Africa–Asia Trade and Investment: Potential for Ownership.” Washington, D.C.: World Bank.

CHAPTER FOUR REGULATIONS AND COMPETITIVENESS OF THE FOOD-PROCESSING SECTOR IN SELECTED AFRICAN COUNTRIES GOODLUCK CHARLES AND DAVID RWEHIKIZA

Introduction The issue of regulations in the food-processing sector and how they affect competitiveness has received little attention in the literature, especially in developing countries (den Hertog 2010). A few studies on regulations (e.g. ESRI 2007; Poppe et al. 2008; den Hertog 2010) focus largely on general regulatory frameworks and are mostly based in developed countries. This leaves a knowledge gap in how regulations affect the performance, growth and competitiveness of highly regulated firms such as food processors in developing countries. In consideration of the fact that the food-processing sector plays a significant role in trade and the economic development of most developing economies, and there are limited studies on the regulatory issue, this chapter examines the regulations directed at the food-processing industry and their effects on the competitiveness of food-processing firms in selected African countries (Tanzania, Ghana and Rwanda). The foodprocessing sector comprises a significant proportion of manufacturing firms in these countries and it plays a significant role in the competitiveness of their economies. For instance, in Tanzania this sector accounts for almost a quarter of all registered manufacturing enterprises. The sector provides employment to about 58,000 people, which represents about 56 percent of the total number employed in manufacturing.1 The sector accounts for nearly 30 percent of Ghana’s GDP, whereas the manufacturing industry contributes 25 percent.2 In Rwanda, food-processing firms and agro-

1 2

Bank of Tanzania, 2010. An Enterprises Map of Ghana, 2012.

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industries dominate the manufacturing sector, comprising almost 35 percent of the total number of local industries. Arguably, the food sector has a multiplier effect that generates growth in related industries, such as packaging, production of food industry equipment, agriculture, specialized storage and transportation, industrial and graphic design, civil, industrial and environmental engineering and food science. In view of this, there have been some recent efforts by the governments of African countries to promote competitiveness and the productivity of the sector. For example, through initiatives like “Kilimo Kwanza” and the promotion of development corridors, Tanzania is augmenting agro-processing and agribusiness and adding value to unprocessed foodstuffs produced in the country. Likewise, Ghana has made several policy and regulatory reforms since 2006 to improve the regulatory framework in the food sector, even though the sector is still small and the domestic food chain is dominated by small and mediumscale businesses that process locally grown crops. The government of Rwanda has been emphasizing the promotion of a viable food-processing sector, and has made adequate resources available for the sector to comply with accepted standards. Efforts are being made by Rwanda to encourage informal food processors to convert to the formal sector by improving the regulatory framework and simplifying the compliance process. Nevertheless, the degree of regulation in the food-processing sector in most developing countries is still high because of public concern about food safety and hygiene. Several policies and regulations in different countries highlight the rationale for regulating food processors and promoting product quality and safety standards. In Tanzania, for example, the National Health Policy guides the Tanzania Food, Drugs and Cosmetics Act, 2003, enacted for the purpose of regulating, inter alia, food and food products manufactured and/or imported into the country. The Food and Nutrition Policy (1992) covers extensively the issue of food hygiene and categorically insists that food quality and standards must be maintained. The National Health Policy of Ghana (2007) intends to ensure food safety by promoting and enforcing standards for the production, storage, sale and handling of food and drink in markets, restaurants and through other vendors. To ensure that processed foodstuff meets nutritional requirements, the policy emphasises the need to control the quality and standard of food. Similarly, the Rwanda National Nutrition Policy (2005) recognises the need to strengthen policies for food processing, fortification and preservation, as well as enforce the legislation relating to standards in the food-processing sector.

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In all three countries, the governments have established a number of regulatory authorities to regulate food processing, which relate to business registration, licensing, permits and inspection. Licensing regulations ensure that business operators in the food sector carry out their activities in a way that safeguards public welfare, and the health and safety of consumers. There are also regulations designed to ensure that business operations comply with standards for protecting public health, safety and the environment. The governments of Tanzania and Ghana have passed several laws which provide for regulatory authorities to collect fees and charges from enterprises to finance their activities and operations. This is also the case in other African countries, such as Kenya, Zambia and Botswana, where the agencies carrying out food safety and control activities are spread over several ministries and have a mandate to charge fees. Although regulations are enforced across different African countries, they are widely criticized by business associations, researchers and industry stakeholders as they are seen as one of the key barriers to business performance and growth (Charles 2012; Charles and Mchau 2010; CTI 2011; TDB 2011). The argument is that most regulations impinge on the competitiveness of the sector by increasing the cost of doing business, largely due to high user fees, delays in the clearance of goods and the bureaucratic propensity for standards, in terms of evaluating and testing the quality of goods (Charles and Mchau 2010). Simplification of the regulatory framework is therefore an important step in promoting the competitiveness of the food sector. Then again, reviewing the regulatory framework requires a thorough understanding of the prevailing situation and the status of the current regulations so as to propose interventions that will add value to the existing regulations. This calls for a critical analysis of the regulatory framework of the food-processing sector and how it affects its competitiveness. This chapter therefore reviews the impact of regulating the food sector from the economic and social perspective. In an attempt to contribute to an understanding of the regulatory system in African countries and how it could be rationalized, the chapter reviews in detail the regulatory frameworks in the food-processing sector in Tanzania, Rwanda and Ghana. It also glances at the regulatory system in Kenya, Botswana and Zambia, based on a brief review of the laws governing the food sector in those countries. The comparative analysis of the regulatory frameworks in the three countries aims to provide a comprehensive picture of how regulations influence the competitiveness of economic sectors in developing countries. The sector further highlights the impact of regulations on the

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food sector and proposes areas in which the regulatory system could be harmonized. The approach used to generate the information and data presented in the chapter was qualitative in nature, based mainly on the collection of secondary data, and in-depth interviews with regulators, food processors and representatives of private sector associations. The information generated from the literature and interviews was validated through focus group discussions, which brought together regulators and food processors. The analysis of the findings entailed integrating the information drawn from legal documents, enterprises and focus group discussions.

Overriding Perspectives on Regulating the FoodProcessing Sector The food-processing sector in most African countries is currently dominated by the private sector. Given the characteristics of food-processing entities in a market-oriented economy, regulations are seen as a legal instrument for ensuring that an orderly environment and good business practices are in place. As proposed by the OECD (1994), regulations are a set of “incentives” established by the legislature, government or public administration that dictate the behaviour of citizens or enterprises. According to the public-interest theory of regulation, an economic regulation is premised on the existence of significant market failure resulting from economies of scale and scope in production, imperfect information for market transactions, and unregulated markets and externalities, with the result that the distribution of wealth is unequal (Jalilian et al. 2007). Thus, efficient government interventions in the form of regulations are expected to improve social welfare and prevent/correct undesirable market results. In this case, regulations in the food sector are necessary for dealing with market failure, promoting fairness, ensuring public safety and protecting the environment. However, there is increasing recognition amongst policy makers that the existence of market failure does not mean that government regulations can necessarily improve an unregulated market, especially when one considers the positive role of market mechanisms (Antle 1996). The private-interest perspective suggests that too much regulation in any sector creates economic inefficiency (den Hertog 2010). According to this view, individuals are essentially self-interested, whether within or outside the public arena, and it is therefore necessary to analyze the regulatory process as a product of relationships between different groups. In the extreme case, it is argued that regulation always leads to socially

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sub-optimal outcomes because of “inefficient bargaining between interest groups over potential utility rents” (Newbery 1999, 134). Opponents of regulation (e.g. Chittenden et al. 2003; Sanjay and Dennis 2009) argue that regulations restrict business start-up, impede successful performance and contribute to business failure. In the presence of conflicting arguments on the impact of regulations on business performance, we argue that there is a need to balance the level of regulations. This requires disentangling the impact of regulation from the many other factors shaping business performance, such as competitive pressure arising from product and labour markets, relations in the workplace, the availability and cost of technology, and owner-managers’ knowledge and skills. Regulations in the food sector, for instance, have been dominant instruments for achieving food safety and hygiene, but the critical issue is how best to achieve that goal. While regulations governing food production, processing and marketing may provide benefits by increasing the hygiene and safety level of the nation’s food, they can, on the other hand, increase producers’ costs and potentially raise food prices. The costs of food safety regulation include the industry’s cost of compliance, borne by both the industry and consumers of its products, and administrative costs borne by taxpayers and the deadweight loss associated with taxation. Since the administrative burden increases transaction costs in the market and impedes the competitiveness of food-processing firms, it can be argued that an excessive administrative burden can reduce competitiveness as scarce resources are spent on complying with legal requirements concerning the safety and quality of food. Thus the challenge is how to ensure that the regulations maximize the net benefits of increasing food hygiene and safety.

Regulations Governing the Food-Processing Sector in Tanzania The food-processing sector in Tanzania is governed by a diverse set of regulations. They include those that govern manufacturing firms in general, and those aimed particularly at the food-processing sector. Some regulations vary from one type of food to another depending on the manufacturing complexity of the food and the sub-sector to which it belongs. Nevertheless, in this section, we review the regulations that in one way or another govern the food-processing sector. In terms of establishment, registration and licensing of food-processing firms in Tanzania, the industry is regulated by more than ten laws. Some of the laws cut across various sectors, whereas others are specific to a

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particular foodstuff. For instance, the Business Licensing Act, 1972 (Cap 208 R.E. 2002) requires any person, natural or corporate, carrying on business in Tanzania for profit or gain to be licensed. The Business Registration Act provides for procedures and issuance of the Certificate of Registration upon payment of the business registration fee. The Business Activities Registration Act, 2005 requires all business undertakings or entities established in certain jurisdictions to be registered3 and obtain a certificate of registration upon payment of the prescribed fee.4 The Business Activities Registration and Trade License Act also established the Business Registration and Licensing Authority (BRELA), which is mandated to register all business undertakings in the area of its jurisdiction.5 The Tanzania Food, Drugs and Cosmetics Act, 2003 provides for the mandatory registration of premises dealing with the manufacture of food products regulated under it.6 The Public Heath Act provides that “a person shall not, for purposes of compliance with public health matters, engage in food manufacturing without being registered by the licensing Authority.”7 The Dairy Industry Act 2004 provides that any person who deals in milk or milk products shall register with the Board to undertake the production, processing, marketing or importing of milk or milk products, whether manufacturers, importers or retailers.8 The Fisheries Act, 2003 empowers the Minister responsible to impose mandatory licensing and registration on all fishing vessels, which could also be registered under the Business Licensing Act. The Cashewnut Industry Act, 2009 requires every cashew nut dealer, whether a buyer, processor, importer, exporter, warehouse owner or operator, to register with the Cashewnut Board.9 The Coffee Industry Act, 2001 established the Coffee Board with the power to register and issue a licence for buying, liquoring, processing, roasting, warehousing and exporting coffee.10 The Tea Act, 1997 (Cap 275 R.E. 2002) prohibits the manufacture of tea for sale without a licence issued by the Board, even though tea manufacturers must have a business registration licence. The Sugar Industry Act, 2001 (Cap 251 R.E. 2002) established the Sugar Board with the power to issue licences to sugar 3

Section 8 (a). Section 11 (3). 5 Sections 8 and 14. 6 Section 18 (1). 7 Section 138. 8 Section 17.-(1); Section 15 (1). 9 Section 12 (1). 10 Section 12 (1). 4

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manufacturers and small-scale sugar operators. The Public Health Act of 2009 provides that all premises registered for food manufacturing must maintain and adhere to the prescribed public health standards throughout the duration of registration.11 Several regulatory authorities are mandated to inspect food-processing firms to ensure that they comply with the regulations and legal requirements. For example, in addition to the registration of foodprocessing firms, the Tanzania Food and Drugs Authority (TFDA) has power to inspect any premises and carry out routine inspection after the product has been introduced in the market. In addition, there are the TFDA-enacted regulations that provide for the inspection of the premises of food processors, including the Import and Export of Food Regulations (2006), the Food Hygiene Regulations (2006), Fee and Charges (2005), and Treatment and Disposal of Unfit Food (2006). The Public Health Act, 2009 provides the authorities under the act (i.e. Health Officers) with, inter alia, the power to carry out inspections.12 The Business Activities Registration and Trade License Act appoints officers who are empowered to conduct inspections.13 The Fire and Rescue Act provides the commissioner or any fireman or person authorised by him with the right to enter any premises and inspect fire safety standards.14 The act also states that the applicant for the fire and rescue service shall pay the commissioner for the services of any fireman and for the use of equipment as may be prescribed by the minister. As regards the Dairy Industry Act, the minister may introduce regulations providing for the inspection of dairies and persons in or about dairies who have access to milk or milk products, or to any vessels or containers used in them.15 Labour-related legislation is also found in the list of laws providing for the registration of food processors. The Employment and Labour Relations Act, 2004 requires employers, including food processors, to register with the Labour Commissioner their plan for promoting equal opportunities and eliminating discrimination at workplaces.16 The Occupational Safety and Health Act, 2003 provides that a person who is the owner or occupier of a factory or workplace before starting operations needs to register such factory or workplace.17 The National Social Security Fund Act, 1997 lays 11

Sections 134 and 135. See sections 5(g), 7(a) and 118. 13 Sections 26 and 27. 14 Section 6 (1). 15 Section 32. 16 Section 7 (2). 17 Sections 15–17. 12

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down the mandatory requirement that every contributing employer is registered (unless such an employer was registered under the existing fund), within one month and in the prescribed manner.18 The Labour Institutions Act, 2004 empowers labour officers appointed under it to effect inspection in relation to employment-related and labour issues.19 At the same time, the Occupational Safety and Health Act appoints inspectors mandated to inspect workplaces or factories during the day or at night without prior notice.20 The the Environment Management Act, 2004, requires inspection for environmental compliance.21 The act provides the legal and institutional framework for sustainable management of the environment, principles for managing the environment, the prevention and control of pollution, waste management and environmental quality standards. It empowers the minister responsible to recommend to the licensing authority whether the project in question should be licensed or not, and where a licence has been issued to recommend that it be cancelled if the project or undertaking does not comply with the environmental standards set by the Act. The Industrial and Consumer Chemicals (Management and Control) Act, 2003 established the National Chemist Laboratory with the power to ensure that any chemical producer complies with good manufacturing practices and undertakes an environmental impact assessment before starting operations.22 This act also empowers the Chemical Laboratory Agency to issue licences for the production, transporting, importing, exporting, storage and dealing in chemicals for a prescribed fee. Interviews with six enterprises operating in the food-processing sector indicated that all enterprises concur that regulations are necessary and business cannot run harmoniously without them. According to the enterprises interviewed, regulations protect the health and safety of customers, they help businesses to improve quality and ensure that there are fair business practices. However, all enterprises were concerned about the multiplicity of regulatory authorities, the duplication of regulations and high cost of compliance. One of the major concerns was the inspection of the same parameters by different regulators, with each authority charging a fee for the inspection. The majority of the enterprises felt that the regulatory functions of the Tanzania Bureau of Standards (TBS), the TFDA and the Government Chemist could be harmonized. The results of 18

Section 11. Section 43 (4); Section 45. 20 Sections 4–6. 21 Section 5. 22 Section 17(c). 19

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the analysis done, for instance, by the TBS or the Government Chemist could be shared by all. While large enterprises are compelled to employ professional staff or experts to handle regulatory issues, small firms cannot afford it. Some companies engage up to three staff to undertake compliance activities. This is costly for the companies and it affects their competitiveness. It was reported that the motivation of most regulators is to collect revenue rather than to facilitate enterprises to comply with the regulations. Both small and large enterprises were concerned about the wastage of time, delays, bureaucracy, corruption, frustration and inconvenience caused by the regulations. This shows clearly that the main concern is not only about the monetary costs incurred by enterprises, but also the opportunity costs of regulation. The majority of enterprises claim that compliance fees add costs to business and lead to an increase in the prices of their products and services. This makes businesses less competitive. Almost all business people interviewed complained about harassment by Government officials from the regulatory authorities. In general, regulators are seen as the police rather than facilitators. Communication between regulatory authorities and enterprises is ineffective. As a result, most business enterprises lack adequate information on the requirements for compliance. It was therefore suggested that there is the need for the Government to increase awareness of compliance issues. Ineffectiveness of the regulatory system and unnecessary delays discourage investment in the country.

Case Study: Evidence of Regulatory Challenges from a Selected Tanzanian Enterprise This is a large food-processing company based in Dar es Salaam, dealing specifically with ice cream, mineral water and juice. The company appreciates the value of regulations for maintaining food safety and fair competition. However, the problem is that there are too many regulations and unnecessary inspections, sometimes done by different regulators. The main agencies regulating this company are the TBS under the Ministry of Industry and Trade; the Food Security Department and Tanzania Tropical Research Institute under the Ministry of Agriculture; the TFDA under the Ministry of Health; the Occupational Safety and Health Authority (OSHA); Fire and Rescue; Tanzania Atomic Energy Commission (TAEC); Government Chemist Laboratory Agency; Customs Inspections; BRELA; and the Tanzania Revenue Authority (TRA). The aspects regulated by various regulators in this company are as follows:

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x TFDA controls the quality, safety and effectiveness of foodstuffs produced by the company in an endeavour to protect consumers’ health. It regulates the importation, production, distribution, storage and sale of foodstuff to the market. TFDA conducts frequent inspections to ensure that the food is of the required standard. It inspects imported chemicals and registers new products launched by the company for a fee. TFDA also certifies vehicles used for the marketing and transportation of the company’s products. x The TBS sets standards and acts as a member of ISO providing the company with quality International Standards. The agency certifies the imports and the company’s new products introduced in the market, for a fee. x The Government Chemist Laboratory Agency performs quality analysis of foodstuff produced by the company and inspects chemicals imported, for a fee. x OSHA checks the company’s premises and conducts inspections of the health, safety and well-being of workers and of workplaces. It inspects the working environment and the equipment used in operational activities, for a fee. x The TAEC inspects imported chemicals (raw materials) and exports of processed food products, for a fee. x The Tanzania Tropical Pesticides Research Institute deals with the surveillance, quarantine, inspection of end products and the issuing of the Phytosanitary Certificate to certify the absence of pests and pest damage in the company’s products. x The Food Security Department provides the company with a food safety permit for the imports. x Fire and Rescue under the Ministry of Home Affairs inspects fire prevention equipment, such as fire extinguishers. x Customs inspections: the government has sub-contracted private companies to certify exports (e.g. COTECNA). Their role is to certify that buyers’ requirements (as expressed in the letter of credit) are met. These private companies certify quality, quantity, price and packaging. x Weights and Measures are responsible for fair trade transactions through certification of Weights and Measures. According to this company, the major challenges of the regulatory system include the presence of a multiplicity of regulatory bodies, duplication of similar functions, delays, wastage of time and high fees. For example:

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x In manufacturing some of its products, the company requires ascorbic acid for fermentation. For this single item, four regulatory bodies have to be approached for certification. The Chief Government Chemist Office has to test the chemical to see whether it is fit to be used in processing food products. This office provides the Chemical Permit after verification. The TFDA tests the same chemical before providing a permit to use it. The TBS has to provide certification on the same item. The TAEC comes in to see whether the item is harmful or not. It carries out this function from its headquarters in Arusha, so the company has to make arrangements for the sample to be tested there. All these regulators charge a fee for their services. x The company imports wheat to process various food products. Because wheat is an agricultural product, the company must obtain an import permit from the Tanzania Tropical Research Institute. It also requires a Food Safety Permit from the Food Security Department under the Ministry of Agriculture. Then, TFDA issues the Food Import Permit. The TAEC is supposed to check for harmful radiation. All these bodies test for the quality of one item and all of them charge a fee for their service. x In most cases, the launching of new products introduced by the company is delayed due to multiple regulations on similar items, especially on the importation of inputs. This causes a lot of inconvenience and business opportunities to be lost. x Most of the regulatory authorities charge a fee in terms of percentage. For example, the Government Chemist Laboratory simply registers the name of the chemical and charges 0.5 percent of the CIF price. GCL, TFDA, TBS, TTPRI, TAEA and the Food Security Department charge 0.5 percent of the CIF or FOB value of the consignment being exported or imported, respectively. x The company has employed three professional staff specifically to deal with compliance. The three officers are full-time staff, always busy making sure that all compliance issues are handled properly. As most payments for compliance are done through a bank, one officer spends almost all the time dealing with bank transactions for compliance. x The motivation of most regulators is to collect revenue rather than focusing on their quality and standards control function. In some cases, regulatory officers dare to earn extra money from the business in the execution of their functions.

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Food-Processing Regulatory Framework in Ghana The review of the regulatory framework for the food-processing industry in Ghana entailed identifying the major regulations and regulatory authorities responsible for regulating the sector, and assessing the real practice on the ground by interviewing selected regulators, private sector organizations (PSOs) and selected enterprises. The findings indicate that laws governing the food-processing sector are classified into legislation on standards, legislation on food and drugs, legislation on the environment, laws on animal products and laws governing occupational safety and health. Ghana has twelve major institutions and agencies for controlling food activities. However, there is an ongoing review of the statutes to realign the functions and responsibilities of these agencies to deal with overlapping areas.

Legislation on Food-processing in Ghana Legislation on Standards x Standards Decree, 1967 (NLCD, 199), superseded by the Standards Decree, 1973 (NRCD 173) x Ghana Standards (Certification Marks) Rules, 1970 (LI 662) x Ghana Standards (Certification Marks) (Amendment) Rules, 1970 (LI 664) x Standards (Amendment) Decree, 1979 (AFRCD 44) x Ghana Standards Board (Food, Drugs and other goods) general Labelling Rules, 1992 (LI 154) x Weights and Measures Act, 1975

Legislation on Food and Drugs x x x x x x

Food and Drugs Law, 1992 (PNDCL 305B) Food and Drugs (Amendment) Act, 1996 (Act 523) Animals (Control and Importation) Ordinance (Cap 247) Diseases of Animals Act, 1961 (Act 83) Local Government Act, 1961 (Act 54); 1993 (Act 462) Fire and Rescue Act, 1963, Amended in 1997

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Legislation on the Environment x Environmental Protection Agency Act, 1994 (Act 490) x Pesticides Management and Export Control Act, 1996 (Act 528)

Laws on Animal Products x x x x x x

Animals (Control of Importation) Ordinance (Cap 247) Diseases of Animals Act, 1961 (Act 83) Veterinary surgeons law (1992) Local Government Act 1992 (Act 462) Fisheries Act (2002) Fisheries Regulations (2010)

Laws governing occupational Safety and Health x Radiation Protection Regulations 1993 (Legislative Instrument 1559) x Environmental Protection Agency (EPA) Regulations and EPA Standards Act 490 x Workmen’s Compensation Law 1987 x Legislation and Policy on Occupational Safety and Health 2000 x Labour Law of 2004 x Environmental Assessment Regulations1999, L.I1652 The main regulatory agencies actively governing the food-processing sector in Ghana are the Standards Board, Food and Drugs Board, LGAs, National Fire Services, Environmental Protection Agency (EPA) and various ministries responsible for health and food security. The Ghana Standards Board (GSB) is the national statutory body with overall responsibility for standardization and the quality assurance of goods and services for both the local market and for export. The Board is also the custodian of the Weights and Measures Decree (NRCD 326, 1975). GSB has seven divisions, namely standards, metrology, inspection, testing, certification, finance and administration. However, Article 3(2) (k) of GSB provides an opportunity for the Board to cooperate with representatives of any industry, or with any government department, local authority or other public bodies or persons with a view to securing the adoption of standards.

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The Food and Drugs Board (FDB) is the national regulatory body under the Ministry of Health with the responsibility of implementing the Food and Drugs Law of 1992, (PNDCL 305B) and of regulating the manufacture, import, export, distribution, use and advertising of food, drugs, cosmetics, medical devices and household chemicals with respect to ensuring their safety, quality and efficacy. The local government authorities (LGAs) are mandated to inspect all meat, fish, vegetables and all other foodstuff and liquids of whatever kind or nature intended for human consumption, whether for sale or not, and to seize, destroy and otherwise deal with all foodstuff or liquids that are unfit for human consumption and to supervise and control the manufacture of foodstuff and liquids of whatever kind or nature intended for human consumption. Also, the Veterinary Services Directorate (VSD) of the Ministry of Food and Agriculture (MOFA) is responsible for the hygiene and inspection of meat, animal health (both ante- and post-mortem) and the management of abattoirs. In addition, the Biotechnology and Nuclear Agriculture Research Institute and the Radiation Technology Centre of the Ghana Atomic Energy Centre Commission (GAEC) are responsible for providing radiation services. The Ghana Standard GS 210:2007 (Specifications for Irradiated Food) are used to regulate irradiated food. The Environmental Protection Agency (EPA) issues environmental permits and pollution abatement notices for controlling the volume, type, constituents and effects of waste discharges, emissions, deposits or other sources of pollutants, and of substances which are hazardous or potentially damaging to the quality of the. All food-processing companies are required to comply with the environmental requirements. The Ghana National Fire Service was established in 1963 by Act 219 with the primary aim of fighting and extinguishing fires, and to render humanitarian services. Subsequently, in 1997 the Ghana National Fire Service Act (Act 537) was passed to re-establish the Ghana National Fire Service with the object of preventing and managing undesired fires and other related matters, with an expanded mandate. Food processors’ premises are required to be inspected by the National Fire Service and to obtain a certificate of compliance with fire safety requirements. In addition, as Ghana has not yet established a specific institution for governing health and safety issues at workplaces because of fragmented legislation governing occupational health and safety, several other institutions are involved in dealing with occupational safety and health compliance in the Ghana food-processing industry, including the EPA, Department of Factory Inspectorate, Labour Commission, the GSB and the GAEC.

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Interviews and focus group discussions with regulators, the Association of Ghana Industries (AGI), the Fruit Processing and Marketing Association of Ghana, as well as two enterprises, revealed that the food-processing sector must be regulated to ensure that food processors comply with safety and health standards. Interviewed regulators had the feeling that the duplication of regulations in the Ghanaian food-processing sector is minimal. “Although there are a lot of regulators in Ghana, we have agreed that the FDB should take the lead in enforcing regulations in the foodprocessing sector,” said the director-general of the GSB. The main role of the GSB is to set standards for the food-processing sector, which are enforced by the FDB. “LGAs basically deal with the informal sector, especially the street food sellers and they offer health certificates to personnel,” said the director-general of the GSB. One interesting point is that if the processor is certified by the GSB and the FDB, LGAs have no authority to govern the processor. This helps to reduce duplication of the activities of regulators and to encourage processors to formalize their businesses. It was noted that the GSB and FDB collaborate in some of their activities, including inspections and the sharing of reports and laboratory facilitates. Before introducing such collaboration in 2007, there were several overlaps in regulating the food-processing sector, especially in relation to inspection and market surveillance. For instance, inspections done by the FDB for the purpose of registration used to overlap with GSB inspections for certification and conformity assessment; post-market surveillance activities by the GSB as a step in the certification process overlapped with FDB inspection at the borders, markets and warehouses; destination inspection by the GSB for conformity assessment overlapped with inspection by the FDB to enhance coordination of registration, importation and post-market surveillance activities; and export certification, which the GSB considered a conformity assessment activity relating to goods to be exported, which it felt was within its legal mandate, could overlap with the FDB tasks of food production, premises inspection or registration of foodstuff. These overlaps implied that, for example, manufacturers and importers could be subjected to two tests, where one test was sufficient, thus duplicating efforts and imposing unnecessary costs on the private sector. Under the current structure, however, the FDB is the central food safety agency for Ghana, in charge of coordinating all activities relating to food safety. In this capacity, the FDB implements the policy decisions of the ministries concerned (MOFA, the Ministry of Health, and the Ministry of Local Government and Rural Development), and enforces the standards

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set by the GSB through inspection and conformity assessment, either directly or through relevant agencies such as the districts and municipalities. The functions of the GSB are mainly focused on registering products and setting standards, in particular, in line with its public sector status, on those standards where there is moral hazard or asymmetry of information. Although the GSB feels that they should also be in charge of conformity assessment, there is a proposal that recommends that the responsibility for setting standards and initial registration should be kept firmly separate from inspection, conformity assessment and certification, because of the potential risk of conflict of interests. Under these arrangements, the GSB as the official standardsetting agency would be in charge of mandatory functions, whereas the FDB and EPA would be in charge of managing voluntary functions. Assigning the initial registration of a product to the GSB could also potentially conflict with its proposed responsibility for setting standards. However, entrusting the initial registration of a product to an enforcement agency (e.g. the FDB), which would also be responsible for subsequent conformity assessment of that product, would introduce a more significant conflict of interest. According to the Director of Inspection at GSB, [O]nce product is certified by GSB, the report is sent to FDB for them to enforce the standard. Unless they need to check the conformity of the selected product, FDB does not retest the products that have already been certified by GSB. The technical committee of FSB that is responsible for developing standards has a member from FDB. Both GSB and FDB have at least one Board member from each other, and this has been instrumental in enhancing their collaboration. FDB also collaborates with the National Board for Small Scale Industries (NBSSI), the Herbal Medicine Association, Pharmaceutical Association, Consumers Associations and Government Ministries involved in food-processing as well as tertiary institutions.

For example, to facilitate the compliance of small food processors, GBS lowers the fees charged to SMEs provided that they are registered by the NBSSI. The Board offers training, in collaboration with tertiary institutions, in quality control and standards. GBS collaborates with the LGAs to govern the quality of street food and vended products in terms of training and inspections. The LGAs in this case focus on safety matters at the local level. They also work with the Health Officers from the Ministry of Health, offer training and conduct inspections on health-related issues. Ghana is currently developing a food safety policy that would facilitate the sustenance of effective links, define responsibilities and enhance

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coordination among food safety agencies. The policy is also expected to clarify overlaps in regulatory roles for effective food safety management along the food chain. According to the CEO of FDB, the policy is being developed by the FDB with support from the World Health Organization (WHO). Additionally, to ensure the safety and quality of food and drugs for the public, FDB is collaborating with allied institutions, including GSB, the Ministry of Food and Agriculture and its agencies such as the Veterinary Services Directorate and the Plant Protection and Regulatory Services Department, among others. The CEO added that the FDB would improve the capacity of the analytical laboratory, intensify post-market surveillance activities, establish a Food Safety and Quality Assurance protocol and procedures for SMEs involved in food-processing, and intensify the training of street food vendors and traditional caterers. Several challenges faced by regulators in Ghana are similar to the ones found in Tanzania, Rwanda and other African countries. The interviewed regulators raised the issue of limited budget, limited human resource capacity, lack of adequate infrastructure including labs, vehicles and equipment, and consumers’ limited awareness of quality issues. Regulators feel that most informal food processors operate in inappropriate conditions and therefore do not comply with standards. In this case, the role of LGAs is critical. Regarding human resource capacity, regulators are facing the challenge of labour turnover, whereby some staff are poached by private companies. Therefore, in an attempt to cover their budget deficits, regulators charge fees for product testing, certificates, advert approvals and licences. However, the government pays the salaries and covers a substantial part of the operational costs of the regulatory authorities. According to the interviews held with PSOs, the private sector in Ghana does not feel that there is a serious duplication of regulatory functions, though small food processors find it expensive to meet the regulatory costs. The Association of Ghana Industries (AGI) has developed a collaborative relationship with regulators and is now recognized as a government partner. It has the opportunity to look at the legal bills prepared by the government and make comments; monitor budget implementation and make comments; attend meetings on the budget before it is approved; develop the private sector development strategy; and promote compliance with standards in various sectors. However, a major concern raised by AGI is corruption, which basically emerges from the attitude of some staff of the regulatory authorities. An interview with the owners of two food-processing companies revealed a number of issues that are worth noting. First, the regulatory system in Ghana has been improving and the regulators in recent years

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have become more customer-oriented. Second, cooperation between GSB and FDB has eliminated duplication in product testing and certification. “The best thing about the current arrangement is that FDB recognizes the certificate offered by GSB,” commented one respondent. The enterprises visited felt that the cost of regulation was nominal and was not significant to the enterprise given the service offered by the regulators. Then again, the main concern was about lack of coaching and training. The respondents felt that the regulators needed to improve the coaching and training of the enterprises so as to institutionalize self-regulation in the industry. The other concern of enterprises is that imported products are subsidized more than locally manufactured products. The enterprises were also concerned about duplication of the regulations governing occupational safety and health, due to the presence of five regulators that handle it, namely the EPA, the Department of Factory Inspectorate, the Labour Commission, the GSB and the GAEC. This is mainly because of fragmentation of the laws governing safety and health issues in the industrial sector. Overall, it is noted that the food sector in Ghana is regulated by a number of regulators from different ministries. However, since 2006 the country has been active in reviewing the regulations and streamlining the functions of regulators. This is still an ongoing process and the country is now developing its food and safety policy as well as a national quality infrastructure. The proposed national quality infrastructure and the national food and safety policy are expected to further streamline the regulations in Ghana and further improve the regulatory framework. The capacity of laboratories over the last decade has improved significantly, whereby Ghana now has ISO 17025 certification for some analyses. For example, both the GSB and FDB have an ISO-accredited microbiological lab and an ISO-accredited chemical lab. The Food Research Institute (FRI) has ISO-accredited labs which provide services to the GSB and FDB. In addition, PSOs have managed to develop a collaborative relationship with the regulators and are generally positive about their conduct, though they feel that they need to transform more. Public education and creating awareness of health and safety issues are considered to be one of the key strategies for increasing compliance in the Ghanaian food industry. In order to minimize the interference of LGAs in the operations of enterprises, LGAs are mandated to govern the informal food processors that are not regulated by the GSB and FDB. This arrangement is good since it minimizes the fees and time required for food processors to comply. It also encourages food processors to formalize and comply with standards in the industry. Sharing reports and working with other

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regulators in the governance of the regulatory authorities have enabled Ghana to address some of the challenges relating to the duplication of regulatory functions. Investing in modern laboratory facilities and the sharing of regulators’ lab facilities are also among key developments in the food-processing sector. However, regulators in Ghana, as in other developing countries, are underfunded, leading to the challenges of budget constraints and limited capacity to deliver. Although the government of Ghana has been funding most of the regulators’ operational costs, most reform activities have been funded by development partners.

Regulatory Framework Governing the Food Sector in Rwanda The regulatory framework of Rwanda has been greatly affected by the history of the country. The 1994 genocide destroyed Rwanda’s fragile economic base, severely impoverished the population, and eroded the country’s ability to attract private and external investment. However, over the last ten years, Rwanda has made significant progress in stabilizing and rehabilitating its economy. Even with the remarkable development of the private sector, the regulatory framework in the food-processing sector is yet to be developed to a level comparable with Tanzania. This is due to the smallness of the private sector which is still basically developing. The main regulators dealing with the food-processing sector are the Rwanda Bureau of Standards (RBS), the Ministry of Health, the Ministry of Labour, LGAs, the Rwanda Revenue Authority and the Rwanda Environment Management Agency (REMA). In contrast to Tanzania, most regulatory functions in the food-processing sector are centralized in a few institutions. Although several regulatory functions are carried out by the ministries, Rwanda is devolving regulatory activities to agencies. The RBS, a public institution established by the Standards Act 3, 2002 and amended by the Standards Act 43, 2006, is responsible for undertaking all activities pertaining to the development of standards, quality assurance and metrology in the country. The RBS is responsible for inspecting agricultural products entering and leaving the country and for inspecting and certifying food-handling premises, in collaboration with the Ministry of Health. The RBS is mandated to set standards, offer certificates, and conduct inspections and market surveillance in collaboration with the Ministry of Health. RBS has been able to strengthen collaboration with stakeholders such as the Ministry of Trade and Industry, the Rwanda Development Board, and district and sector officials so that there is an improved and harmonized market surveillance scheme. It actively

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participates in market surveillance activities within member countries of the East African Community (EAC) by implementing the harmonization of market surveillance activities to make standards compulsory in partner states. RBS is currently transforming its structure into a more effective one that will be able to meet the needs of the growing private sector.

The Transformation of the RBS Structure The RBS is undergoing structural changes following a new national quality policy. The new policy is in line with the country’s goal of enhancing the efficiency and effectiveness of the National Quality Infrastructure. Under the new structure, the RBS will become the National Standards Body (NSB), which will be comprised of the National Standards Institute (NSI), National Quality Testing Laboratories, and the National Certification Services. It will be responsible for the development of national standards as well as conformity assessment (testing and certification) services. The NBS will also be responsible for issuing SPS certificates on behalf of the Ministry of Agriculture. Once restructured, the new standards body will house the National Metrology Organisation, comprising the National Metrology Institute (NMI) and the Legal Metrology Department (LMD). The NMI provides calibration and maintenance services, while the LMD provides verification (testing) and approval of measuring equipment. Inspection activities currently under the RBS will be transferred to the National Inspectorate Board to avoid conflict of interest. The RBS will report to the ministry responsible for Trade and Industry. The National Inspectorate Board will be an autonomous body responsible for carrying out inspections to protect the public and the environment from dangerous, counterfeited and low quality products and services. It will provide professional and independent inspection services in all sectors throughout the supply chain to meet the specific needs of regulators, manufacturers, suppliers of goods and services and any other interested party. The other part will be the Rwanda Accreditation Services, which will be responsible for accreditation of private and public Conformity Assessment Service Providers. The RBS has greatly improved service delivery and efficiency. For example, if the business has met all the requirements for product registration, the RBS takes a maximum of three days to register the product. Even if the product is not registered the client must get feedback within three days. There is a zero tolerance of corruption in government ministries and agencies, and this is put into practice. This has been possible because the government is very keen to manage bureaucracy in

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government agencies through the prime minister’s office. The PSOs are involved in developing the standards with the regulatory authorities through the Private Sector Federation. The state–business relationship has been improving, and the private sector is becoming more active in making decisions that affect the sector. The Rwanda Environment Management Authority (REMA) was established in 2005 to oversee the implementation of environmental law and policy through education and sensitization, law enforcement and monitoring, and capacity-building support for other institutions. To achieve its objectives, REMA has to work with and through the public and private sector and civil society. Thus the mandate of REMA covers inter alia the food-processing sector. The Organic Act 29, 2005 determines the administrative entities for local government and establishes their number, boundaries and structure. The role of LGAs is focused on town planning, the construction of rural roads, transport, hygiene and sanitation and environmental protection. In this case, besides the issue of hygiene, food processors are not regulated by LGAs. However, Rwanda still faces some weaknesses in the enforcement of regulations, largely as a result of inadequate capacity and manpower in the regulatory agencies. The general problem has been recognized by the government, which is establishing an inter-ministerial task force to review the state of implementation of standards and codes, and to promote and sustain existing efforts to raise awareness of corporate governance issues in the public and private sphere. It will ensure that the relevant regulatory and enforcement bodies are actively enforcing the laws, including the Rwanda Revenue Authority (RRA), REMA and RBS. As more companies and consumers operate businesses at national, regional and overseas level, the work of the Quality Assurance Unit (QAU) involves national, regional and international cooperation. The QAU therefore cooperates closely with other RBS departments to achieve its objectives. Not only has the QAU established internal cooperation, but it has established mutual cooperation with other organizations nationally (with REMA, the Rwanda Development Board (RDB), districts, etc.), regionally and internationally through formal and informal agreements. The scope of the cooperation covers various activities that include training, complaints handling, certification and testing, etc., to promote a sound approach to consumers. Because of good cooperation, the public has been empowered by being given access to free information to help them exercise their rights and avoid deception regarding the products they consume. RBS has also provided a platform for consumers to make complaints regarding sub-standard products and to enable them to make

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good and effective choices when buying goods. This encourages food processors to meet the food standards so that they can operate in Rwanda. The interview with two enterprises in Rwanda indicates that enterprises are generally positive about the effectiveness of the interactions and communication between enterprises and regulators. However, they feel that the RBS has been playing too big a role, and in some cases it fails to be effective. They therefore propose that some RBS roles should be decentralized and devolved to other regulators. The enterprises also acknowledge that Rwanda has been successful in developing private– public communication. Key government officials are accessible through their mobile phone numbers, and the service charter requires them to respond to public needs on time. Regarding regulators, enterprises are positive about the effectiveness of the interactions and communication between enterprises and regulators. They are happy with the Rwanda Development Board (RDB), which acts as one-stop centre for both local and foreign companies. For example, through the RDB, the business registration process is completed within one day, provided all the required documents are made available. The RBS accredits some companies’ labs to undertake some of its roles. For example, some labs of Inyange Industries Limited, the biggest beverage company, have been accredited by RBS, and the lab analyzes some foodstuffs on its behalf. In general, as in the case of other developing counties, most regulatory agencies in Rwanda face liquidity problems because of the limited budget allocated by the government. The country is therefore prompting the sharing of labs with local companies as a strategy for achieving better quality through public–private partnerships. It has developed a strong link between PSOs and regulators, and PSOs are supporting regulators in promoting quality standards.

Further Observations from Other African Countries The review of the regulatory framework in other African countries indicates that the food-processing sector is generally overseen by multiple regulators. For example, the agencies which carry out food safety and control activities in Kenya are spread over four major ministries, those of Agriculture, Health, Livestock and Fisheries Development, and Trade and Industry (which houses the Kenya Bureau of Standards). The enforcement functions include inspecting and monitoring food and premises for catering and manufacturing, abattoirs, fish-landing sites, and imports and exports of foods and plant material, among others. In Botswana, the responsibility for food control, food safety and food quality is shared by

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four ministries. The Ministry of Health coordinates the implementation of the Food Control Act and Public Health Act (including food regulations under these Acts) through the National Food Control Board. The Ministry of Local Government, through the local authorities, implements the Township Act and all other Acts providing for food control, particularly food inspection. The Ministry of Industry and Trade implements acts on the licensing of the food industry, consumer protection and standardization. National food standards are prepared by the Botswana Bureau of Standards in collaboration with other key stakeholders. These standards are mainly based on Codex standards. International, regional and bilateral food control cooperation is coordinated by the National Food Control Board. The food control services in Zambia are distributed across a few main stakeholders, namely the ministries of Health, Agriculture, Commerce, Trade and Industry, and Local Government and Housing. The Ministry of Health is responsible for policy formulation and developing and reviewing legislation pertaining to food safety; implementation is carried out by the Central Board of Health, created under act of parliament through the District Health Boards. The Ministry of Agriculture provides the same service through the plant quarantine and livestock development services, which are responsible for protecting against plant and animal diseases, respectively. The Ministry of Commerce, Trade and Industry is responsible for registering the food industry and also houses the National Food Safety Committee. The Food and Drugs Board, with a wide membership, advises the Minister of Health on issues relating to food safety. The Zambia Bureau of Standards is responsible for certifying food products and issues voluntary standards, as opposed to the Ministry of Health, which imposes mandatory standards.

How Do Regulations Affect the Competitiveness of the Food-Processing Sector? Most regulations have an effect on the attractiveness of the industry in which the firm is operating (Kohn 1998). Positively, effective regulations are likely to create a better business environment for the sector to operate in and to improve the competitive capability of the businesses operating within it (Charles 2012). This concurs with the argument that competitiveness of firms is more and more dependent on deliberate action (“man-made advantages”) through the interaction of private and public actors, including the government (Charles 2012). It is clear from this perspective that a regulation that changes the cost structure of an industry

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can alter the structure, performance and competitiveness of that industry (Kohn 1998). The reviewed studies (e.g. Chittenden et al. 2003; Beale and Lin 1998; Sanjay and Dennis 2009; SBS 2002; Blackburn 2003) show that the main regulatory issues that negatively affect competitiveness of the private sector are diverse. Likewise, the study revealed that the hurdles caused by regulations in the food-processing sector emerge from the multiplicity and duplication of business regulation processes, including: multiple stages in the business registration process; multiple uncoordinated inspections of premises; multiple uncoordinated testing of products; multiple permits for premises and products; a lack of detailed description of the rationale for regulations; poor performance and a lack of accountability in enforcement; and a lack of information for users, which leads to difficulties with compliance. An analysis of regulations in the food-processing sector in the three countries shows areas in which they overlap, and the consequent regulatory costs borne by enterprises in the sector. Evidence indicates that enterprises in all countries recognize the value of regulations for maintaining an orderly environment. There is a feeling though that most regulators, especially in Tanzania, are motivated by revenue collection rather than facilitating enterprises to comply with the regulations. Additional costs incurred by enterprises in complying with regulations include: cost of familiarization with the regulations and planning how to comply with them; remuneration of staff or experts to facilitate compliance; higher operational costs; licence fees or other charges imposed by the regulations; and the cost of meeting reporting requirements imposed by the regulations. The enterprises were also concerned about the wastage of time, delays, bureaucracy, corruption and inconvenience caused by the regulations. This shows that additional regulatory costs paid by firms operating in the foodprocessing sector increase the burden on businesses and therefore affect their ability to compete. The study shows that several factors contribute to the complexity of regulations in the food-processing sector. First is the phenomenon of multiple uncoordinated inspections of premises, with a variety of regulations aimed both at maintaining food hygiene and safeguarding the safety of employees. All these contribute to the regulatory complexity found in the sector. Second is the multiple, uncoordinated testing of products, whereby authorities involved in the periodic testing, for a fee, of processed food products add to the costs of enterprises. Even if the testing fee is high, the main cost in this case is the market opportunity lost while waiting for the results and the necessary permits. Third, the legal framework does not provide a clear division of responsibilities and

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coordination between inspecting authorities. As a result the efforts of the controlling authorities are duplicated, due to lack of communication and coordination. Fourth, the bureaucracy involved in the regulatory process, the waste of enterprises’ time and resources, the delays, corruption, frustration and unnecessary inconvenience significantly affect the operations of enterprises. Finally, the government’s use of regulation as a source of revenue motivates rent-seeking behaviour rather than facilitating enterprises to comply.

Conclusion and Recommendations The study reveals several issues regarding the regulatory framework in the food sector in the countries studied that indicate there are mixed arguments on the benefits and costs of regulating. While to some extent regulations are seen as beneficial to food-processing enterprises, in most countries they are largely perceived as a stumbling-block. Regarding the benefits of regulations, it is seen that they deal with market failure, promote fairness, ensure public safety and protect the environment. In terms of problems, regulations are seen as diverting scarce resources away from productive and profit-generating activities towards the discovery and understanding of and compliance with regulations. They increase administrative costs through the fees charged, as well as the opportunity costs incurred by enterprises. The lessons drawn from the countries studied indicate that the foodprocessing sector is commonly regulated by a number of regulators belonging to at least four different ministries. Fragmentation and duplication of tasks in many countries results from the complexity of regulating the food-processing sector. To simplify the regulations, countries such as Ghana and Rwanda are encouraging regulators to collaborate and to promote reference points among regulators. Inherently, all the countries studied are attempting to improve the regulatory framework governing the food-processing sector by introducing collaboration among regulators, developing a national quality infrastructure, creating awareness in the area of food safety, sharing facilities and analysis reports, dividing roles among regulators, promoting self-regulation, and improving the state–business relationship. It also appears that even though the majority of food processors appreciate the value of regulations, they have several concerns regarding their effect on the performance of their businesses. Food processors are concerned about the multiplicity of regulatory authorities, the duplication of regulations and the high cost of compliance. They feel that most

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regulators are motivated by revenue collection rather than facilitating enterprises to comply with regulations. Although regulations protect consumers’ health, over-regulation causes several problems, including wasting enterprises’ time in attending to and following up compliance issues, increasing costs to businesses due to multiple fees, the increasing number of informal operators, and bureaucracy and corruption. In view of the fact that additional regulatory costs to firms operating in the food sector increase the burden on businesses and therefore affect their ability to compete, rationalization of the regulatory framework in the sector is a necessity. This also conforms to the private-interest theory of regulation, which suggests that too much regulation creates economic inefficiency. Logically, a reduction in unnecessary costs to firms would extend its effect to other economic dimensions, including taxes paid to the government, employment and the people’s income. It should be noted however that reducing the regulatory burden is not synonymous with reducing the number of legislative requirements. Therefore, although we advocate that the regulatory system in developing countries should be rationalized, it is important for the food-processing sector to recognize that regulations may benefit society and enterprises. Therefore, governments in developing economies ought to look into the advantages and disadvantages of every viable response to any situation that may merit its intervention, and recommend regulation when it is the best option. Based on the findings presented in this chapter it can be concluded that for developing countries to be able to compete internationally in different sectors they need to review their regulatory system in order to comply with international best practices. This entails: (1) the removal of unnecessary controls on business activities; (2) simplification of processes to reduce the compliance costs of businesses and the administrative costs of the government; (3) the separation of competing functions of regulation and revenue generation; and (4) inter-agency coordination to improve consistency and efficiency in administration. With the recognition of the potential benefits, costs and problems of regulations, there is a need to balance the regulatory level. This calls for the application of the recommended tools, such as the Regulatory Impact Assessment to measure the impact of regulations before introducing a new law. Finally, there is a need to extend academic research to measure the impact of regulations on the competitiveness and performance of firms in the food-processing sector in more countries so as to provide statistical data that will guide the policy process. This requires further analysis of how private and public interest theories apply in specific sectors, such the food-processing sector in different contexts.

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References Antle, J. M. 1996. “Efficient Food Safety Regulation in the Food Manufacturing Sector.” American Journal of Agricultural Economics, 1242–47. Blackburn, R. and M. Hart. 2004. “The Burden of Employment Regulation in Small Firms: Hyperbole or Reality?” Paper presented at the ISBA/ACCA Regulation Day Conference, January. Charles, G. 2012. “Effects of the Regulatory Framework on Competitiveness of the Dairy Sector in Tanzania.” (Forthcoming). International Journal of Public Sector Management. Charles, G. and K. W. Mchau. 2010. Improving the Competitiveness of the Dairy Industry through Rationalization of Regulatory Compliance: Policy Proposal. Ubungo: TAMPA. Chittenden, F., S. Kauser, and P. Poutzouris. 2002. “Regulatory Burdens of Small Business: A Literature Review.” Downloaded from http://www.sbs.gov.uk/content/analytical/research/RegulationReport.pdf. CTI. 2011. Simplifying Compliance of Multiple Regulatory Authorities to enhance the Ease of Doing Business. Dar es Salaam: CTI. ICG. 2012. Enterprise Map of Tanzania. London: International Growth Centre (IGC). ESRI. 2007. Business Regulation Survey. Department of the Taoiseach brochure. http://www.betterregulation.ie [retrieved 24 August 2011]. Jalilian H., C. Kirkpatrick, and D. Parker. 2007. “The Impact of Regulation on Economic Growth in Developing Countries: A CrossCountry Analysis.” World Development 35 (1): 87–103. den Hertog, Johan. 2010. Review of Economic Theories of Regulations. Discussion Paper Series 10–18, Utrecht School of Economics. http://www.uu.nl/rebo/economie/discussionpapers [downloaded March 2011]. Kohn, A. 1998. No Contest: The Case Against Competition. Rev. ed. Boston: Houghton Mifflin. Newbery, David M. 1999. Privatization, Restructuring, and Regulation of Network Utilities. Cambridge, MA: MIT Press. OECD. 1994. The OECD Reference Checklist for Regulatory DecisionMaking: A Draft Recommendation of the OECD. Paris: PUMA. Parker, D. 1999. “Regulation of Privatized Public Utilities in the UK: performance and governance.” International Journal of Public Sector Management, 213–236.

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Poppe, K. J. J., J. H. M. Wijnands, H. J. Bremmers, B. M. J. van der Meulen, and G. L. Tacken. 2008. Food legislation and competitiveness in the EU food industry: Case studies in the dairy industry. Luxembourg: Office for Official Publications of the European Communities. Sanjay, B. V. and H. T. Dennis. 2009. “Cost of State Regulations on California Small Businesses Study.” Working Paper, California State University, Sacramento. Small Business Council (SBC). 2002. Annual Report. London: SBC.

CHAPTER FIVE THE EAST AFRICAN COMMUNITY (EAC) AND ITS INFLUENCE ON TANZANIA’S MANUFACTURED EXPORTS INTENSITY AND COMPETITIVENESS DEUSDEDIT A. RWEHUMBIZA

There is a widespread consensus that exporting manufactured goods may be good for economic growth and development. This is because manufacturing generates employment opportunities through value-adding activities based on the existing economic resources of a given country (Albaladejo 2002; UNIDO 2007; UNCTAD 2008). Theoretically, good performance of the manufacturing sector is mainly driven by human capital, information and communications technology (ICT), technology transfer through FDI and licensing, and the development of infrastructure (Albaladejo, 2002). The stimulation of export intensity and competitiveness of manufacturing products should start with greater efficiency relative to regional markets as a necessary route to international competitiveness. The key lies in the conversion of prevailing comparative advantages to national comparative platforms (Mwaigomole 2009). The poor performance of many African economies, including EAC partner states, has been associated with the low growth of exports in general and of manufactured exports in particular. As a consequence, moves towards outward-oriented trade policies and trade liberalization to support export growth have become standard practice in the economic growth and industrialization strategies of African countries (Söderbom and Teal 2001; Gries and Naude 2004). Tanzania, like other EAC partner states, has had no substantial growth in manufactured exports and is thus a case in point. The manufacturing sector in Sub-Saharan Africa, which includes the East African region, has been hampered by several factors, including high input costs, lack of technological learning and innovation, inward-looking

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trade policies, protective industrial policies, overvalued exchange rates and inflation rates (Mazumdar and Mazaheri 2003; Fukunishi 2004). Such constraints have led to the lack of structural change and supply-side constraints, which make it difficult for producers to respond to and meet the requirements of the export market, the very slow rate of growth in productivity and the limited range of goods in which EAC partner states are competitive. Moreover, Musonda and Wangwe (2000) argue that cross-border investment in East Africa has not only been low (5–10 percent of total FDI) but has also been unidirectional, mainly flowing from Kenya to Tanzania and Uganda. The literature suggests that regional trade arrangements (RTAs) like the EAC are intended to increase production, the export of goods (trade intensity) and the competitiveness of firms within the region, following greater internal demand and reduced barriers to trade (Amponsah 2002; Holmes et al. 2006). Another reason behind them is that firms operating within RTAs have the opportunity to exploit economies of scale through enlarged and more diversified local markets, and enhance intra-industry trade through vertical value-chain specialization (Amponsah 2002). The interest of many studies has been in the factors that generally propel export growth in Tanzania’s manufacturing sector (see for example, Mbele 2000; Semboja 2007; Kahyarara n.d; Mpangalile et al. 2008). The question of whether or not the revived EAC has so far improved trade intensity and competitiveness of Tanzania’s manufactured exports has received much less (if any) academic enquiry, and is the knowledge gap that this work attempts to address. The general objective of this empirical study is to analyze the influence of the newly established EAC on Tanzania’s manufactured exports to other founder states (i.e., Kenya and Uganda). Its specific objectives are first, to analyze the dynamics and intensity of Tanzania’s manufactured exports before and after the establishment of the EAC, and second, to measure the competitiveness of Tanzania’s manufactured exports within the region. The study focuses mainly on the founder states because they are the ones that ratified the Treaty for the Establishment of the EAC that entered into force on 7 July 2000, and administered a Customs Union Protocol for several years (from 1 January 1 2005) before the accession of Rwanda and Burundi. Nevertheless, Rwanda and Burundi are incorporated in the recommendations because they have been part of the community since 1 July 2007. The study’s findings offer important information that could help policy makers and negotiators identify and safeguard national manufacturing interests in the context of the EAC framework. In addition, the findings

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shed light on the mechanisms that Tanzania suggests would allow for the better implementation of the joint initiatives to improve competitiveness among manufacturing firms within the Community, while learning from other countries that have formed similar arrangements. The next section of this chapter defines regional integration and reviews literature on manufacturing. The third section develops trade models to measure Tanzania’s manufactured export intensity and competitiveness, and provides a brief discussion of data sources. The fourth section presents the empirical analysis using simple descriptive statistics and trade models. The fifth section concludes and gives policy recommendations after discussing the opportunities and challenges of Tanzania’s manufactured exports in the East African region.

What is Regional Integration? Regional integration is a process in which states enter into a regional organization in order to increase regional cooperation and diffuse regional tensions. Past efforts at regional integration have often focused on removing barriers to free trade in the region, increasing the free movement of people, labour, goods and capital across national borders, reducing the possibility of regional armed conflict, and adopting cohesive regional stances on policy issues such as the environment. Such an organization can be based on either a supranational or intergovernmental decision-making institutional order. The logic behind the integration of EAC partner states is multi-faceted. It has a peace-building component, which aims to reduce conflicts through greater interdependence and co-operation, as well as putting in place region-wide security arrangements, and to enhance international bargaining power in the course of expanding and protecting East African markets. Furthermore, integration aims to take advantage of economies of scale through exploiting development opportunities while conserving cultural heritages. The performance of Tanzania’s manufactured exports since the establishment of the EAC in 2000 is worth assessing because industrial development is one of the twelve areas of cooperation identified in the 2001–2005 EAC Development Strategy, and in contrast to agricultural commodities manufactured products tend to experience more elastic demand and less volatile prices. Moreover, investment opportunities available in EAC Partner States exist in the manufacturing sub-sector (EAC ,2006).

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Determinants of the intensity and competitiveness of a given country’s manufactured exports in RTAs like the EAC can be best explained by the orthodox theory of the customs union, together with a new trade theory based on economies of scale. The former is a conventional theory based on the comparative advantages of a country, whereas the latter is a modern theory explaining the advantages of trade due to large-scale production, cumulative experience and transitory advantages resulting from innovation. The two theories are similar in that they both consider trade between countries and emphasize the advantages emanating from specialization (Holmes et al. 2006; Brakman et al. 2006). The difference between traditional theories and the new trade theory is that, while it is generally accepted that traditional theories explain interindustry trade sufficiently, they fail to explain intra-industry trade. At the level of inter-industry trade (based on monopolistic competition), comparative advantage continues to be the dominant explanation of trade flows, whereas at the level of intra-industry trade, economies of scale become the dominant explanation of trade flows in differentiated products (Grubel and Lloyd 1975). The new set of trade theories relaxes the assumptions of perfect competition and constant economies of scale, and again supports the role of government intervention as an active policy to advance the international competitiveness of a country (Grubel and Lloyd 1975). Therefore this chapter opts for these two theories in order to capture both components, i.e. dynamics and export intensity, and the competitiveness of Tanzania’s manufactured exports to other EAC partner states based on the exploitation of comparative advantages found in the country.

The Orthodox Theory of the Customs Union In this theory, Viner (1950) argues that trade creation occurs when an RTA leads to greater specialization according to comparative advantage and thus to a shift in production from high-cost (non-member nations) to lower-cost (member nations) sources. Trade diversion occurs when a customs union diverts consumption from goods produced at a lower cost outside the union to goods produced at a higher cost (but tariff free) within the union. Regarding the latter theory, Sloman (2004) argues that at any cost, static effects (especially trade creation) are not guaranteed for countries with similar factor endowments, small markets, low incomes, undeveloped capital markets and different tax and regulatory arrangements. Therefore it

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is worth testing empirically the applicability of both Viner’s and Sloman’s arguments in the context of the EAC.

The New Trade Theory: Economies of Scale Argument Under the new trade theory, economists argue that many industries experience increasing returns on specialization because of the presence of substantial economies of scale. As output expands with specialization, the ability to realize economies of scale increases and so the unit costs of production should decrease (Mill 2002). This has been witnessed over the nineteenth and twentieth centuries. The argument is that since economies of scale are important for the production of manufactured goods, an increase in the size of the global economy makes it easier to recover fixed investment costs (Brakman 2006). Amponsah (2002) argues that RTAs present firms in member countries with the opportunity to exploit economies of scale through enlarged and more diversified markets. This implies that market access expansion among EAC partner states should be an advantage to all countries’ manufactured goods. Deep integration and associated externalities generate technology transfer, productivity gains and economies of scale (Smithian gains). Therefore, enhanced intra-EAC trade is expected to provide opportunities for Tanzania’s manufacturing firms to achieve greater economies of scale and lower output prices as the firms capture larger markets for their products, both at home and in other EAC Partner States. Various researchers (Elbadawi 1998; Yoshino 2007) have proved that expanding manufacturing production is often considered a necessary stepping stone to economic growth and development in developing and least developed countries. However, the empirical evidence in support of a country’s manufacturing export intensity and the corresponding international competitiveness in the context of African regional trade arrangements is inconclusive. The following part therefore reviews the dynamics in terms of export intensity and the competitiveness of various countries’ manufactured exports based on both the orthodox theory of customs union and the economies of scale argument. Iapadre (2004) did a study using intra- and extra-regional trade intensity which found that in general, an increase in intra-regional trade intensity is associated with a fall in the corresponding index of extraregional trade. In this study, Mercado Común del Sur (MERCOSUR) was proved to be the area with the highest level of intra-regional trade intensity, with an upward trend. The index for the Association of

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Southeast Asian Nations (ASEAN) was approximately equal to that for the European Union (EU), whereas the North American Free Trade Area (NAFTA) appeared to be the region with the lowest intra-regional trade intensity. In another similar study, Okabe and Urata (2007) analyzed the impacts of Free Trade Agreements (FTAs) on trade flows. The results of this study show that trade intensity increased after the establishment of FTAs for NAFTA, MERCOSUR, the arrangement between New Zealand and Australia known as Closer Economic Relations (CER) and the ASEAN Free Trade Area (AFTA). It was further found that trade intensity between Japan and Mexico increased noticeably in 2005 after the establishment of the Japan–Mexico FTA. MERCOSUR showed the strongest intra-FTA trade relationship, as the trade intensity figure was recorded at 7.8, followed by CER (5.6) and AFTA (4.5). Also Gries and Naude (2004), using a random effects (RE) Tobit model found that foreign market access was a significant determinant of South Africa’s manufactured exports. These findings imply that there may be a direct relationship between transborder costs (which include tariff and non-tariff barriers) and export performance. In an assessment of winners and losers from regional integration agreements, Venables (2002) used the generalized Ricardian model and a Heckscher-Ohlin-Armington model, and found that if manufacturing starts from small base and if factors complementary to manufacturing (for example, provision of business services, telecommunications and infrastructure) are thinly distributed, then the likelihood of manufacturing development agglomerating in a few locations is relatively high. Further, Yoshino (2007) found that Africa’s manufacturing sector is mainly constrained by supply-side and foreign market access factors, which include internal transport costs and physical infrastructure ranging from roads and ports to energy and telecommunications. The knowledge gap in these studies is that they do not depict empirical evidence from East Africa. The findings of previous studies, done by Komba (1999) using comparative analysis, Semboja (2007) using the Porter Probit model, Söderbom and Teal (2001) using simple descriptive statistics, and Yoshino (2007) using the Tobit model, generally reveal that overvalued exchange rates and constraints on imports can make exporting unprofitable for nearly all products and not only, or mainly, for manufactured ones. Also, Gylfason (1998) used cross-sectional regression analysis and found that the real exchange rate is inversely related to inflation as long as the adjustment of the nominal exchange rate to prices is not instantaneous.

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These findings agree with those of Mbelle (2000) and Mwaigomole (2009), who argue that Tanzania’s manufacturing performance and the corresponding competitiveness of exports have been mainly constrained by limited production capacity. They also mention other factors that are detrimental to the competitiveness of the country’s manufactured exports, such as weak trade promotion, the high cost of utilities, the lack of a dynamic entrepreneurial sector, and poor infrastructure. Given the methodology that all these studies used and the time that has elapsed, specifically for the studies by Komba (1999), Mbelle (2000) and Söderbom and Teal (2001), it is worth testing the competitiveness of Tanzania’s manufactured exports in the framework of the newly established EAC. Davis and Weinstein (2003) argue that manufactured exports are determined by increasing returns, rather than comparative advantage as in the standard trade theory. Davis and Weinstein found that the costs associated with manufacturing performance include market information (through soft infrastructure), launching overseas sales promotion campaigns, and adapting products for foreign markets. These costs can be particularly severe for smaller firms. In comparison, large firms may be better placed to expand abroad as they have more resources with which to enter foreign markets. Yoshino (2007), in an empirical study of domestic constraints of firmlevel manufacturing exports in Africa, argues that firm economies of scale (firm size) are “a robust determinant of export participation and explain a firm’s export intensity.” Elsewhere, Albaladejo (2006) analyzes Turkey’s industrial competitiveness, but it is not put into a comparative perspective as the Middle Eastern and North African countries that Turkey is compared with are not that strong in the manufacturing sector. Nonetheless, Albaladejo suggests that Turkey should improve the investment environment, develop local capabilities and establish stronger links to global markets. In another similar study, Albaladejo (2004) used the Manufactured Export Competitiveness (MEC) index to assess the industrial competitiveness of West China. The results show that the index values for Sichuan, Shaanxi and Yunnan in 2002 were 0.2887, 0.2550 and 0.1115, respectively. Hence, Shaanxi has the strongest export base of the three provinces, but shows weaknesses in the technological upgrading of its exports. The author concludes that these provinces have great industrial potential given their rich natural resources and an abundant supply of cheap labour. This implies that Tanzania is likely to have a comparative

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advantage in resource-based and labour-intensive manufactured exports within the EAC. From the reviewed studies it is clear that a country’s export intensity and competitiveness in foreign markets are influenced by factors internal and external to both exporting firms and the country at large. Mwaigomole (2009) puts forth two stages as regards such factors. The argument is that sources of trade intensity and competitiveness would be drawn from factor-driven and investment-driven stages. At the factor-driven stage, exporting firms and the country as a whole should own basic production factors such as natural resources, cheap and skilled labour and networks with global markets. At this stage, industries in factor-driven economies like the EAC partner states compete using relatively cheap and unsophisticated technology. On the other hand, the investment stage is characterized by the ability of a country’s industry to absorb and improve the technology. Some Asian countries and other countries like Argentina, Brazil and Mexico come under this stage of competitive advantage. Generally, RTAs like the EAC are expected to increase a country’s intra-regional trade intensity at the expense of extra-regional trade intensity. The assumption is that sources of production and exports shift from high-cost (non-RTA partner states) to lower-cost (RTA partner states). RTAs normally enable a country to specialize by using comparative advantage. In this case, the production efficiency of firms improves, enabling them to realize economies of scale, which in turn increase their export intensity and competitiveness. So it is very important to find out if this is happening to Tanzania’s intra-EAC manufactured exports. In order to assess the influence of the EAC on the performance of Tanzania’s manufactured exports in the region, the study uses simple descriptive statistics together with intra-regional trade intensity and regional competitiveness models. Simple descriptive statistics are used to observe the dynamics of Tanzania’s manufactured exports before and after the establishment of the current EAC. The latter analysis is supplemented by the measure of Tanzania’s share in intra-EAC manufactured exports, by modifying the models (indices) used by Venables (2002), Iapadre (2002), and Okabe and Urata (2007). The competitiveness of Tanzania’s intraEAC manufactured exports is empirically measured by bringing into the model the context of international competitiveness (or specialization).

Model Specification In order to keep in line with the orthodox theory of customs union and the new trade theory (economies of scale argument) that were introduced

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earlier, the following trade intensity model and competitiveness (specialization) model are tested. This is intended to find out if what happens in other countries pursuing RTAs also happens in Tanzania. The results will certainly prove either convergence with or divergence from the employed theories and what is really happening on the ground in respect of Tanzania’s manufactured exports to EAC partner states.

Intra-regional Trade Intensity Model The trade intensity model (or index), pioneered by Brown (1949) and elaborated on by Iapadre (2004), can best serve the purpose of this study. In its simplest form, the intra-regional trade intensity index of the region i (Ii) is equal to the ratio of the intra-regional trade share (Si) to the region’s share in world trade (Wi): (1) Ii = Si/Wi = (tii/ti.)/ (ti./T), Where:

tii = region i’s intra-regional trade ti = region i’s total trade T = world trade

This index is equal to one if the region’s weight in its own trade is equal to its weight in world trade (caused by geographic neutrality, which means the absence of preferential directions in trade flows). On the other hand, if intra-regional trade is relatively more important than trade flows with the rest of the world, as is usually the case, the intra-regional trade intensity index is higher than one. If a region’s intra-regional trade intensity is higher than one, it implies that the region’s trade is “specialized,” i.e. relatively more oriented towards its member countries than towards the rest of the world.

Tanzania’s Share in Intra-EAC Manufactured Exports The intensity of Tanzania’s share in intra-EAC manufactured exports in relation to the world’s manufactured export share in the EAC, (TEAC) is measured by modifying the intra-regional trade intensity model found in Iapadre (2004) to produce the following form: TEAC = (XT-EAC/Xt)/(XW-EAC/XWt),

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Where:

XT-EAC = Tanzania’s manufactured export share in East African region Xt = Tanzania’s total manufactured exports XW-EAC = World’s manufactured exports to EAC partner states XWt = World’s total manufactured exports

TEAC is equal to one if Tanzania’s weight in intra-EAC manufactured exports is equal to the world’s weight in EAC manufactured exports. The index is higher than one if Tanzania’s intra-EAC manufactured exports are relatively more important than manufactured export flows with the rest of the world. This measure helps one to know the dynamics of Tanzania’s manufactured exports and the significance of EAC markets in relation to the markets of the rest of the world. The EAC is expected to have shifted Tanzania’s manufacturing production and exports from high-cost (nonmember nations) to lower-cost (EAC member nations) sources.

International Competitiveness Model, R The international competitiveness model (also called index) or specialization index used by Lundberg (1988) helps to measure Tanzania’s advantage or disadvantage in selling its manufactured products in EAC markets. If Tanzania is a net exporter of manufactured products, then Ri is greater than one; the higher the Ri the greater net exports are relative to domestic consumption, and the stronger the competitiveness of Tanzania’s manufacturing sector and the degree of specialization in manufactured products. Thus, the formula takes the form: Ri = Qi /Ci = (Ci + Xi – Mi)/Ci = 1 + (Xi – Mi) / Ci , Where:

Ci = domestic consumption Qi = domestic production Mi = imports Xi = exports i = products of industry i.

Data Data generating export intensity and export competitiveness were obtained from the Tanzania Revenue Authority (TRA) and international trade statistics of the World Trade Organization (WTO). Since the indices

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(2 and 3) intend to measure the extent to which the EAC has influenced the performance of Tanzania’s manufactured exports, the study uses annual time series secondary data covering a period of eight years, i.e. from 2000, when the establishment of the EAC was ratified, to 2007. This aims to make the study empirically relevant and coherent.

Empirical Analysis This section presents empirical findings with regard to the performance of Tanzania’s manufactured exports in the context of the integration of EAC partner states. The study first looks at the dynamics of Tanzania’s manufactured exports using simple descriptive statistics, followed by the analysis which is supplemented by the export intensity index and the international competitiveness index of Tanzania’s manufactured exports within the East African region. The empirical findings are presented as follows.

Dynamics of Tanzania’s Manufactured Export Markets In 1997, the United Kingdom, Belgium, Luxemburg, Switzerland and the Democratic Republic of Congo were the five leading export markets, accounting for more than 50 percent of Tanzania’s manufactured exports (Figure 1). The lead of these five countries could be attributed to the fact that the EAC treaty was not yet in existence, and during the 1990s (during the Lome IV Convention), Tanzania had already started enjoying trade preferences from the European Union (EU), of which the United Kingdom, Belgium and Luxemburg are members. In this period, Tanzania was still a member of the Common Market for Eastern and Southern Africa (COMESA) Preferential Trade Arrangement, of which the Democratic Republic of Congo was also a member. A comparison of Tanzania’s manufactured export markets in 1997 and 2006 (Figures 5-1 and 5-2) reveals a marked change. In 2006 the leading destinations for Tanzania’s manufactured exports had shifted to Kenya, the United Kingdom, the Democratic Republic of Congo and Uganda in that order, these four leaders accounting for close to 50 percent of Tanzania’s manufactured exports. If the United Kingdom (which had already granted Tanzania free market access through the European Union’s Everything but Arms (EBA) initiative) is left out, the three remaining leading destinations are in Sub-Saharan Africa.

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United Kingdom, 14%

Thailand, 2% Hong Kong, China, 2%

BelgiumLuxembourg, 10%

other, 18%

Spain, 2% Kenya, 3% Malawi, 4% Ethiopia (excludes Eritrea), 4%

Switzerland, 9% Congo, Dem. Rep., 6%

Germany, 4% India, 4%

United Japan, 4% Rwanda, 4% States, 4%

Uganda, 6%

Figure 5-1 Tanzania’s manufactured export markets, 1997. Source: United Nations Commodity Trade Statistics (UN COMTRADE) Database, 2007.

Netherlands, 2% Congo, Rep., 2% Nigeria, 2%

other, 19%

Kenya, 20% United Kingdom, 12%

United Arab Emirates, 2% China, 3% Mozambique, 4% India, 4% Zambia, 4%

Congo, Dem. Rep., 8%

Malawi, 6% South Africa, 6% Uganda, 8%

Figure 5-2 Tanzania’s manufactured export markets, 2006. Source: United Nations Commodity Trade Statistics (UN COMTRADE) Database, 2007.

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This outcome suggests that Tanzania is probably embracing strategy of South–South cooperation, including the implementation of EAC treaty that entered into force in 2000. In fact, of the remaining export markets in 2006, eight were Southern countries, one was in Middle East, and one was in Europe.

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Tanzania’s Share in Intra-EAC Manufactured Exports Although the explanations accompanying Figure 2 indicate that Tanzania’s intra-EAC manufactured exports have increased, the fact that the EAC market is more significant than the world market for Tanzania’s manufactured exports needs to be examined. This can be tested empirically using the second model, which measures Tanzania’s intraEAC manufactured export intensity in relation to the world–EAC manufactured export intensity. The results of the test are given in Figure 5-3.

Figure 5-3 Tanzania’s versus the world’s manufactured export share in the EAC. Source: Author’s construction using data from TRA and international trade statistics, 2007.

Figure 5-3 shows that before ratification of the EAC treaty (1998 and 1999), Tanzania’s weight in intra-EAC manufactured exports was less

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than its weight in world manufactured exports, whereas from the ratification of the treaty in 2000 onwards, the trend was in the opposite direction, taking an upward movement. This suggests that there are factors in the framework of the EAC that generate a preferential orientation in manufactured export flow. Figure 5-4 shows the way manufactured export intensity has been growing.

Figure 5-4 Growth of manufactured export intensity. Source: Author’s construction using data from TRA and international trade statistics, 2007.

Similarly Figure 5-4 shows that before the ratification of the EAC treaty (in 1998 and 1999), the growth of Tanzania’s manufactured export intensity was well below 100 percent, whereas from 2000 to 2006, export intensity, though volatile, was significant, and grew above 100 percent. This index is larger than expected, given the partner states’ importance in world trade. Despite the growth of export intensity from 2000 to 2006, Tanzania’s manufacturing firms remain dominated by the light, resourcebased industries of food, beverages, tobacco, textile and leather, and recent investment trends provide no indication of significant shifts in resource allocation (United Republic of Tanzaniam 2007b). The dominance of light, resource-based industries could be attributed to the country’s concentration on sectors other than manufacturing, particularly agriculture (Mwaigomole 2009). Unlike agriculture, manufacturing has experienced more supply-side obstacles arising from an increase in oil prices, regular

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power cuts, absent or obsolete technology that limits the production of capital goods, the lack of capital among entrepreneurs, and unfair competition from cheap imports (Mbelle 2000; Mwaigomole 2009). The results pertaining to export intensity and growth correspond to the findings put forward by Iapadre (2004), that generally an increase in intraregional trade intensity is associated with a fall in the corresponding index of extra-regional trade. In line with the same results, Okabe and Urata (2007), who analyzed the impacts of free trade arrangements on trade flows, found that trade intensity increased after the establishment of FTAs for NAFTA, MERCOSUR, CER and AFTA.

Competitiveness of Tanzania’s Intra-EAC Manufactured Exports Despite the increase in Tanzania’s weight in intra-EAC manufactured exports (as shown in Figure 3), there is a need to find out if Tanzania’s manufactured exports have been competitive since the revival of the current EAC in 2000. Thus, Figure 5 sets out the results from the third model, which measures the competitiveness of Tanzania’s manufactured products in EAC markets.

Figure 5-5 Tanzania’s intra-EAC manufactured export competitiveness. Source: Author’s construction using data from TRA and international trade statistics, 2007.

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The results in Figure 5-5 show that the competitiveness index, Ri, of Tanzania’s manufactured products in EAC markets has all along (since the revival of the EAC) been below unit (Ri was less than one from 2000 to 2006). This implies that Tanzania consumes more manufactured exports from other EAC partner states than it exports to the same markets. Therefore, Tanzania’s specialization in manufactured exports is still low and the competitiveness of these products in EAC markets is not strong. However, this argument on the competitiveness index is not enough to explain the advantage of the EAC as regards Tanzania’s exports of manufactured goods. Thus Figure 6 illustrates the growth of the competitiveness of Tanzania’s manufactured exports.

Figure 5-6 Growth of Tanzania’s intra-EAC manufactured export competitiveness. Source: Author’s Construction Using Data from TRA and International Trade Statistics, 2007.

The results in Figure 5-6 show that, except for 2004, the competitiveness of Tanzania’s manufactured exports has had an upward trend (positive growth) since 2000. This growth implies that although Ri is less than one, Tanzania has great manufacturing potential, given its rich natural resources plus an abundant supply of cheap labour. Those results are similar to those of Albaladejo (2004), who found that Shaanxi has the strongest industrial base despite the lack of technology for upgrading its exports.

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The fall in Tanzania’s competitiveness in 2004 could be attributed to internal factors that led to a fall in the production of manufactured products of export interest to Tanzania. Such factors have been intensively reviewed elsewhere (see for instance Mbelle 2000; Mkenda 2005; Semboja 2007; Mwaigomole 2009), and are therefore peripheral to the focus of this study. Manufactured exports that were detrimentally affected in 2004 include aluminum products, corrugated iron sheets, paint, textiles, sisal rope, wheat flour and sugar (United Republic of Tanzania 2007a). .

Conclusion With regard to the influence of the EAC on Tanzania’s manufactured exports, the analysis indicates that the integration of EAC partner states is significant. The most outstanding effects in terms of performance are manifested in the shift of markets for Tanzania’s manufactured exports, increased manufactured export intensity, and some increase in competitiveness during the period of integration (2000 to 2006). The study findings are to a great extent consistent with the reviewed theories of international trade. For instance, Viner (1950) in the orthodox theory of customs union argues that trade creation occurs when an RTA leads to a shift in production from high-cost (non-member nations) to lower-cost (member nations) sources. In this regard, the EAC is a building block for Tanzania’s manufactured exports, as the performance of Tanzania’s manufactured exports, at least at the aggregate level, improved after the establishment of the current EAC. Although the research findings show that some progress has been made in terms of the performance of Tanzania’s manufactured exports, the country and its EAC counterparts have a number of challenges to deal with in order to make the integration more lucrative. For example, although the EAC has implemented some infrastructure projects, intra-EAC infrastructure links are not yet satisfactory. Worse still, other challenges that Tanzania’s manufacturing sector faces are internal and inhibit the effective implementation of the national trade policy. Tanzania has, for instance, not yet prepared a national framework for making effective use of the aid for trade facility, which takes into consideration issues that are covered in the enhanced integrated framework and addresses grey areas. Tanzania has a high level of unemployment and markets are fragmented due to poor infrastructure, so the aid for trade initiative is appropriate for building sufficient capacity to enable the country to effectively participate in intraand extra-EAC trade.

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The multiplicity of objectives is another factor that hinders the implementation of a trade policy in Tanzania. This is because Tanzania’s concentration on domestic development is to a great extent disturbed by its effective involvement in two regional groupings (the Southern African Development Community (SADC) and the EAC) whose objectives overlap. These groupings consist of different and sometimes incompatible agenda items that can hardly be coordinated and harmonized. For instance, the implementation of the planned common external tariffs of the SADC and the already existing common external tariffs of the EAC are likely to cause a conflict of interests on the part of some members, and thus common external tariffs will be very hard to administer. The differing initial levels of development and the varying stages and outcomes of policy reforms hold back the level and speed of regional integration. Moreover, the EAC still comprises five small fragmented markets, with four Least Developed Countries (LDCs) and only one nonLDC developing country (Kenya), all experiencing different rates of inflation and hence asymmetric shocks, which normally have a detrimental impact on the prices of not only manufactured exports but also all other types. This is likely to make some countries feel they are not benefiting equally from the Community. The EAC still lacks a strong supra-national institution and an adequate sanctioning mechanism to punish member states that pursue policies that conflict with the Articles of Agreement. For instance, Article 15 of the protocol, which requires the removal of Non Tariff Barriers (NTBs), is regularly violated. Moreover, a mechanism for identifying and monitoring the removal of NTBs that are a threat to Tanzania’s manufactured exports is not yet in place.

Policy Recommendations The researcher considers Tanzania and the EAC as a whole as a sleeping giant, with a lot of potential for overcoming the aforementioned challenges and other problems relating to the research findings. They have many opportunities to exploit as well as capabilities for taking all partner states to greater heights of economic success. Taking into consideration the available opportunities, the researcher makes the following recommendations. The current EAC is very different from the former one. First, currently there is active involvement of the private sector in the formulation of decisions and protocols, as there are an increasing number of outreach programmes to educate East Africans on the benefits of integration.

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Second, on 1 July 2007, Rwanda and Burundi joined the EAC, bringing the number of EAC partner states up to five. With respect to market expansion, Viner (1950) suggests that significant gains might be associated with economies of scale in the formation of RTAs. Therefore, the accession of more members like Rwanda and Burundi to the Community should be used as an opportunity. The outreach programmes should also be used to educate East African manufacturers in how to realize economies of scale through enlarged and more diversified markets in order to have a substantial bearing on their manufactured exports within and outside the region. With the renewed and reinvigorated EAC it is envisaged that the market for Tanzania’s manufactured exports will expand. The establishment of a large regional economic bloc encompassing Burundi, Kenya, Rwanda, Tanzania and Uganda, with a combined population of 120 million, a land area of 1.85 million square kilometres, and a combined GDP of US$41 billion, has great strategic and geo-economic significance with respect to the performance of Tanzania’s manufacturing sector. Therefore, in order to make market expansion meaningful, EAC partner states should avoid having a multiplicity of objectives due to their membership of other regional groupings like the SADC and COMESA, because these will eventually hinder the implementation of trade policies in all the countries. For instance, it is almost impossible to master several customs unions, and so member states should look for the best way to harmonize policies in these different regional groupings or alternatively stop multiple membership. Market expansion is more attractive to FDI and stimulates more domestic economic activities through competition between firms in EAC partner states, which normally leads to a search for new technologies to improve production and trade. Moreover, EAC partner states are more likely to be synchronized because they produce similar manufactured products and trade extensively with each other. This similarity means that they are likely to face similar problems (symmetric shocks) and ultimately require similar policies. Therefore, EAC partner states should attempt to upgrade the capacity and export quality of manufacturing companies, which are largely dominated by small exporters. They should also reconsider the type of FDI that all EAC partner states receive. For instance, the impact of FDI on development and the promotion of valueadding activities in Tanzania are still negligible. For a country like Tanzania, the cost of sacrificing policy independence will decline with the degree of integration with EAC Partner States. EAC partner states should therefore capitalize on the benefits emanating from

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the adoption of similar policies, which include eliminating exchange rate volatility and currency conversion costs, consequently reducing trade costs. It is hypothesized that trade between countries using the same currency can be up to three times greater than between countries using different currencies. As regards market access, currently Tanzania’s manufactured exports to other EAC partner states are duty free, provided that they satisfy the EAC Rules of Origin. The EAC is likely to provide a level playing field for the region’s producers by imposing a uniform competition policy and law, customs procedures, and external tariffs on manufactured products imported from third countries, which should assist the region in advancing its economic development and poverty reduction agenda. Therefore, EAC partner states should expedite the implementation of infrastructure projects such as the East African Road Network, the East African Power Master Plan, and the Lake Victoria Environmental Management Programme, to create a meaningful avenue for entrepreneurs in the manufacturing sector. For its part, Tanzania has to see to it that internal markets are well networked. The usefulness of trade among EAC partner states is indisputable in this era of “knowledge economies,” the age of globalization. The fact is that trade facilitates efficiency through each country doing what it is better at and it also facilitates specialization, which in turn facilitates economies of scale and the possibility of mass production at low and falling costs. Tanzania and the other EAC partner states should therefore try hard to resolve the challenges restraining manufacturing and exploit the available opportunities. The study was limited to the influence of the newly established EAC on Tanzania’s manufactured exports in terms of export intensity and competitiveness within the region. The analysis was at the aggregate level to allow generalization. Taking into account the importance of manufacturing, it is expected that the findings of this study will prompt more studies in this sector. Future studies should therefore analyze this sector at the product category and individual product levels to enable the country and entrepreneurs to identify areas for specialization. Research on Tanzania’s regional performance of such products in comparison with other EAC partner states is also important to help the country establish a mandate regarding offensive and defensive interests for bilateral, regional and multilateral (particularly WTO) business and trade negotiations.

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References Albaladejo, M. 2002. Promoting SMEs in Africa: Key Areas for Policy Intervention. United Nations Industrial Development Organization / African Development Bank. —. 2004. “The Industrial Competitiveness of West China: Strategies and Sectoral Choices for Shaanxi, Sichuan and Yunnan.” Paper Submitted for the United Nations Industrial Development Organization, 23 August 2004. —. 2006. “The Manufacturing Sector in Turkey: Challenges for Structural Change and Convergence.” Background Paper to Turkey’s Investment Climate Assessment (ICA). Amponsah, W. 2002. “Analytical and Empirical Evidence of Trade Policy Effects of Regional Integration: Implications for Africa.” Paper Prepared for the Session on Trade Policies during the African Development Forum III, “Defining Priorities for Regional Integration,” 3–8 March 2002 in Addis Ababa, Ethiopia. Brakman, S., H. Garrelsen, C. Marrewijk, and A. Witteloostuijn. 2006. Nations and Firms in the Global Economy: An Introduction to International Economics and Business. New York: Cambridge University Press. Davis, D. R., and D. E. Weinstein. 2003. “Market Access, Economic Geography and Comparative Advantage: an Empirical Test.” Journal of International Economics 59:1–23. EAC (East African Community). 2002. “Treaty for the Establishment of the East African Community.” Arusha: Publication of the EAC Secretariat. —. 2006. Trade Policy Review. World Trade Organization (WTO). Elbadawi, I. A. 1998. “Can Africa Export Manufactures? The Role of Endowment, Exchange Rates and Transactions Cost.” Paper Presented at the AERC/OECD/IMF Workshop, Johannesburg, 6–7 November 1998. Fukunishi, T. 2004. “International Competitiveness of manufacturing Firms in Sub-Sharan Africa.” Discussion paper No.2, Institute of Developing Economies, JETRO, Japan. Gries, T. and A. Naude. 2004. “The Economic Geography and Determinants of Manufacturing Exports from South Africa.” Paper Prepared for the Conference on Growth, Centre for the Study of African Economies, University of Oxford, 21–22 March 2004.

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Grubel, H. G. and P. Lloyd. 1975. Intra-industry Trade: the Theory and Measurement of International Trade in Differentiated Products. London: Macmillan. Gylfason, T. 1998. Export, Inflation and Growth. University of Iceland, SNS-Centre for Business and Policy Studies, Stockholm, Sweden, and CEPR. Holmes, P., L. Iacovone, and S. Robinson. 2006. Regional Integration, Economic Performance and Trade Agreements. University of Sussex. Iapadre, L. 2004. Regional Integration Agreements and the Geography of World Trade: Statistical Indicators and Empirical Evidence. Rome: La Sapienza University. ILO. 2004. A Fair Globalisation: Creating Opportunities for All. Geneva: ILO. Kahyarara, G. n.d. Market Competition and Performance of Tanzanian Manufacturing. Dar es Salaam: University of Dar es Salaam. Lundberg, L. 1988. “Technology, Factor Proportions and Competitiveness.” Scandinavian Journal of Economics 90 (2): 173– 188. Mazumdar, D. and A. Mazaheri. 2003. The African Manufacturing Firm: An Analysis Based on Firm Surveys in Seven Countries in Sub-Saharan Africa. London: Routledge. Mbelle, A. V. Y. 2000. “The Manufacturing Sector in Tanzania.” Confederation of Tanzania Industries (CTI) and the Confederation of Danish Industries (DI), University of Dar es Salaam, Tanzania. Komba, A. A. 1999. “Structural Change and Competitiveness in Tanzania’s Manufacturing Sector.” PhD. Dissertation, Washington University, Washington D.C. Mill, C. W. L. 2002. International Business: Competing in the Global Marketplace, Third Edition. Washington, D.C.: University of Washington. Mkenda, K. B. 2005. “The Impact of Globalisation on Tanzania’s Labour Market: Evidence from the manufacturing Sector.” A paper prepared for a Policy Dialogue for Accelerating Growth and Poverty Reduction in Tanzania, held at the Conference hall, ESRF, on 28 July 2005. Mpagalile, J. J., R. Ishengoma, and P. Gillah. 2008. “Agribusiness Innovation in Six African Countries: The Tanzanian Experience, Report Prepared for the World Bank Institute.” Sokoine University of Agriculture, Morogoro, Tanzania. Musonda, F. and S. Wangwe. 2000. “Perspectives on Regional Integration and Co-operation in East Africa”, Paper on the Proceedings of the 1st

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Ministerial Seminar on East African Cooperation, Arusha, 25–26 March, 1999. Mwaigomole, A. E. 2009. “Industrial manufacturing and Trade Development in Tanzania.” Journal of International Cooperation Studies 16 (3): 23–9. Okabe, M. and S. Urata. 2007. “The Impacts of Free Trade Arrangements on Trade Flows: An Application of Gravity Model Approach.” Research Paper, Waseda University. Semboja, H. H. 2007. “Analysis of Factors Determining the Tanzania Manufacturing Performances.” Journal of the National Board of Accountants and Auditors Tanzania 20 (2). Sloman, J. 2004. Essentials of Economics, Third Edition. Harlow: Pearson Education. Söderbom, M. and F. Teal. 2001. “Can African Manufacturing Firms become Successful Exporters?” Paper Prepared for the Third United Nations Conference on the Least Developed Countries, Brussels 14–20 May 2001. United Nations Industrial Development Organization (UNIDO) and United Republic of Tanzania (URT). 2007. Country Needs Assessment, Report Prepared by the Research and Statistics Branch, Programme Coordination and Field Operations Division. Dar es Salaam, Tanzania. United Nations Conference on Trade and Development (UNCTAD). 2008. Economic Development in Africa, Export Performance Following Trade Liberalization: Some Patterns and Policy Perspectives. New York and Geneva: UNCTAD. United Republic of Tanzania (URT). 2007a. The Economic Survey 2004. Produced by the Ministry of Planning, Economy and Empowerment, Dar es Salaam, Tanzania. —. 2007b. The Economic Survey 2006. Produced by the Ministry of Planning, Economy and Empowerment, Dar es Salaam, Tanzania. Venables, Anthony J. 2002. “Winners and Losers from Regional Integration Agreements.” Paper of Economics, London School of Economics and CEPR. Viner, Jacob. 1950. The Customs Union Issue. Washington, DC: Carnegie Endowment for International Peace. Yoshino, Y. 2007. “Domestic Constraints, Firm Characteristics and Geographical Diversification on Firm-Level Manufacturing Exports in Africa.” Proceedings of the African Economic Conference. Washington, D.C.: World Bank.

CHAPTER SIX GLOBALIZATION, FOREIGN DIRECT INVESTMENT AND DEVELOPMENT: SOME OPINIONS FROM LOCAL ACTORS IN TANZANIA HURUMA LUHUVILO SIGALLA

Introduction This chapter discusses globalization and development as abstract social concepts influenced by certain ideologies. It also presents some opinions of local actors and experts from public institutions dealing with issues pertaining to globalization, foreign direct investment (FDI) and development in Tanzania. The discussion of this chapter is based on the findings of a pilot study conducted in four public institutions, namely the Tanzania Investment Centre (TIC), the Chamber of Commerce, Industry and Agriculture, the Tanzania Bureau of Standards, and the Business Registration and Licensing Authority. In addition, the chapter presents some concrete observations from the tourist sector. The findings from this discussion show that local actors and experts do not believe that current FDI in Tanzania facilitates local development, contrary to the view propagated by neo-liberal proponents who want us to believe that the private sector and FDI are a panacea for development problems. Based on the perspective and experience of these public officials, Tanzania needs to identify its comparative and competitive advantage more carefully and give greater priority to building the capacity of human resources if globalization and FDI are to work for its development.

Conceptualizing Development: A Complex Endeavour The debate about development is an ancient one and its definition is elusive. For centuries, scholars, politicians and practitioners at the international

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and national level have suggested how individuals and communities can improve socially, economically, politically and technologically. The social world is not static but dynamic, and social changes have taken place. Globalization and development are abstract social concepts, not concrete objects, so their meaning and manifestation may vary across countries. Thus, like any other social concept they are not easy to define. In this chapter, an attempt is made to discuss the link between globalization, FDI and development as far as Tanzania is concerned. It is worth noting that globalization is another stage of capitalism, and is not a new phenomenon. What has probably changed in the capitalist system is the relationship between labour and capital, and how profits are generated and distributed. Today, because of globalization, science and technology—especially the electronic revolution, such as computers—the movement of capital has been simplified. African countries in general and Tanzania in particular have much to do at home in order to make globalization and FDI facilitate the process of development locally (Mshomba 2000). It is not the intention of this chapter to define these concepts, but it is worth asking what is meant by globalization and development. In my view globalization refers to the interconnectedness of sectors of the economy nationally and internationally. This process has been going on for years; historically and anthropologically, in the eighth century, the first travellers, who were mainly sailors from the Far East, China and Persia, established contact with East African people. For instance, Arabs interacted with Bantu people along the East African coast from Malindi and Lamu (Kenya) to Mogadishu (Somalia) as well as in Zanzibar and Pemba (Tanzania) (Sigalla 2011). Development is a process and not an end in itself, and any development strategies should be about people and not things. Nuschler and Nohlen (1993, 55–75) suggest that development is all about “being and not having.” Stieglitz (2002) defines development as the transformation of society. There is a direct link between FDI and globalization. One of the driving forces of globalization is trade, and one of the characteristics of globalization today is the integration of different sectors of the economy, firms, countries and societies in international trade. This integration has been facilitated by the free movement of capital in the form of FDI. In other words, FDI has been one of the vital drivers of globalization (Msambichaka 2006; Rutasitara 2006; Bhalla 1998).

Tanzania’s Development Endeavours Since Independence Since independence, the government of Tanzania has been committed to facilitating the process of development. To aid this endeavour, the

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government has been guided by at least two different ideologies. Mukandala (1994, 55) argues that “every ideology is consequently a guide to practical action. It may of course be a good guide or a poor guide.” The first ideology in 1967 was that of socialism, which emphasized selfreliance. At that time, development policies and strategies focused on local people, and it was believed that Tanzania was able to do what others do in the world. In other words, the engine of development and growth was thought to be people, and there was an attempt to facilitate “a peoplecentred development process.” However, it was not denied that local people at some point would need support, and so it was thought that development aid and foreign firms would make a vital contribution to the development process. Several declarations were made in support of the government’s endeavour to facilitate development, but the “Arusha Declaration” was the cornerstone, which prescribed “values and ethic” for those who were entitled to guide and supervise development activities on the ground. Komba summarizes the meaning of development in the context of the Arusha Declaration in the following way: Overall, it was argued that the development of a country was brought about by people, and not by money. Money, which represented wealth, was the result and not the basis of development. Hard, intelligent and cooperative work was therefore the root of development. In other words, self-reliance meant an emphasis on the people, their land, and agriculture as organized and fused together under the guidance of the policies of ujamaa, selfreliance and good, democratic leadership (Komba 1995, 37–38).

The second phase occurred in 1985 when the Arusha Declaration was replaced by the Zanzibar Resolution. From this point on, Tanzania changed its ideology in relation to development. Shivji (1994, 29) argued that “the ‘socialist’ elements of ujamaa—equality and development— virtually disappeared both in practice as well as in rhetoric.” Peoplecentred development continued to be considered crucial for the development process, but since then other actors, especially FDI, have been given greater priority (Shivji 2006; Sigalla 2006). In the mid-1980s, Tanzania increased its efforts to attract FDI as strategy for promoting growth and development. There was a dramatic shift from ujamaa and self-reliance to the neo-liberal ideology of the free market economy; first, from people-centred and internally propelled development to market forces as the engine of development; and second, from the bottom-up approach, in other words from the village or community, to the top-down approach (from global to national and finally community level) propagated by the “Washington Consensus” (see for example Stiglitz, 2002; Easterly

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2002). This shift was partly due to a recommendation by international financial institutions, especially the World Bank and the International Monetary Fund (IMF) (Shivji 1994, 169–211; Stiglitz 2002).

Globalization, FDI and Development Theoretically, the debate on globalization is influenced by two major views, the radical and free-market view. The former perspective, which is based on Marxist ideology, argues that FDI is an instrument of imperialist domination. Through FDI, multinationals take profits away from poor countries. According to this perspective, the argument that globalization brings technology and creates employment for local people is criticized; in practice, the technology under globalization is tightly controlled and that key jobs (especially managerial and well paid ones) are given to people from core/home countries instead of locals in host countries. The latter perspective, which is linked to the modernization theory of development and the theory of comparative advantage and free trade by David Ricardo and Adam Smith, argues that international production is distributed between countries according to the comparative advantages of those countries. Thus, multinationals, through FDI, are seen as “prerequisites” to development and International Financial Institutions like the World Bank, IMF and World Trade Organization (WTO) are in place to support the development of poor countries (Bilton et. al., 2002). The relationship between investment and development is not as obvious and straightforward as some tend to think. The contribution of FDI to local economies and development depends on local economic and trade policies and priorities to cause the trickle-down effect and reverse the vicious cycle of poverty. Easterly suggests that: We should not attempt to estimate how much investment a country “needs” for a given target growth rate, because there is no stable short-run link between investment and growth. We should not attempt to estimate how much aid a country “needs” for a given growth rate, because there is no economic model that addresses that question. (2002, 44)

Easterly indicates that “there is indirect evidence that FDI is good for technological progress” (2002, 185). However, which sector of the economy needs such technological progress depending on its comparative advantage largely depends on local development policies. Whether globalization through FDI will benefit and facilitate development in a host country depends on local policies, which sector should be open to FDI, and what policies should guide such investment for the benefit of local

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people. The so-called “Asian Tigers” have been credited for successfully liberalizing their economies, partly because they have been carefully liberalizing and opening up their local markets in areas where they profit more from such investment. One of the strengths was their local investment in human capital in areas where they have comparative advantage. Investment in other economic and political factors was attracted by solid human capital. Thus, FDI could also increase employment and consequently provide an income for well-established local human capital. For instance, Rutasitara (2006, 30) points out that “In South Korea, state intervention favoured industries that had dynamic comparative advantage, again after consulting with the private sector. Infant industries were given direct or indirect promotional incentives.” As a result of ideological change in relation to development as mentioned earlier in this chapter, Tanzania committed itself to liberalizing its economy through, among other measures, privatizing the then stateowned enterprises. During 1991 and 1993, more than 400 state-owned enterprises were privatized. As a result, well-functioning industries were destroyed as well as a well-established body of human resources (people who were skilled and knowledgeable working in these industries), and some were left out. My conversation with a senior official from the Tanzania Chamber of Commerce, Industry and Agriculture revealed that between 1960 and 1995, over US$ 500 million was invested in the textile industry through a World Bank loan. These industries included among others Mutex, Mwatex, Tabora, Morogoro Canivas, Morogoro Textile and Ubungo Spinning. This investment went hand-in-hand with building the capacity of human resources through training in the field; about 200 Tanzanians were trained at home and abroad as technicians at diploma level and engineers at masters level. Unfortunately, most of them disappeared with the process of privatization.1 This type of privatization did not follow the common argument of “infant industry protection,” which was a popular idea in Japan in the 1960s and in the United States and Europe during the nineteenth century (Stiglitz, 2006). The privatization style of Tanzania in the 1990s had a huge impact on the economy and the development process. Explaining the importance of the link between human resources, FDI and development, scholars such as Gregory Mankiw argue that:

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Information collected during author’s discussion with senior staff from Tanzania Chamber of Commerce, Industry and Agriculture in Ohio Street, Dar Es Salaam, on 16 May 2011.

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Chapter Six human capital (people with skills) could not move across countries but physical capital could. If poor countries’ poverty is explained by their low human capital, then international investors will not want to invest in these countries because skilled labor is necessary to get a good return on machines. If skilled labor is absent, then the return on machinery is low. This could explain why capital flows went more to rich countries than to poor countries (Easterly 2002, 79).

The Manifestation of Globalization and FDI and their Meaning to local Communities One of the fastest growing economic sectors in Tanzania is tourism, which is one of Tanzania’s comparative advantages in the global economy. Consequently, it is logical to expect that its contribution to the development of local communities, at least those surrounding these tourist attractions, would be notable. The Wildlife Policy of Tanzania (2007, 18) emphasizes that “local communities living on village lands with viable populations of wildlife have a role of protecting and wildlife and wetlands resources, by setting aside wildlife conservation areas on their land.” On several occasions, globalization and FDI have meant alienating land or displacing local people in Tanzania. For instance, the findings of a study conducted in Tanga, Mtwara and South Unguja by Sigalla et al. (2011) show that between 2008 and 2011 local people experienced more negative impacts of globalization and the global market than positive ones. As a result of the expansion of the global market in the fisheries and tourist sectors, local artisanal fishers are catching much less fish and cannot compete with industrial fishing companies. In the tourist sector, land along the shore (beach) is occupied mainly by foreign investors and some of them do not abide by the regulations, leading to conflicts between investors and local communities. Proponents of globalization argue that among other benefits of FDI is the creation of employment for local people. Sigalla et al. (2011) show that local communities, especially in South Unguja where the tourist industry is more advanced than in Tanga and Mtwara, complain that the sector for some reason employs more people from outside, from the mainland and Kenya, than local people. In one of the study’s in-depth interviews with local people, a twenty-one year-old male from Kizimkazi-Mkunguni in South Unguja, who had completed ordinary level secondary education, described the impact of FDI on their community’s development in the following manner: When tourist hotels are constructed, sometimes people are not even able to pass through these areas, and a large area of land is occupied. For instance,

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there is one hotel which has constructed a bridge and extended it to the ocean. When you have a fishing vessel, you cannot pass that way. We are not employed in these hotels; they only hired us during the construction, when we worked as casual labourers, carrying bricks and sand, but when they started operating their business, there was no work for us. (Sigalla et al. 2011)

As mentioned above, the displacement of local people has been one of the characteristics of globalization in Tanzania in order to pave the way for FDI. Among other places, displacement has occurred in Ihefu-Mbalali, as a result of annexing it to Ruaha National Park; in Kitulo Makete district, as a result of establishing Kitulo National Park; and in Kipawa, Dar es Salaam, as a result of paving the way for the expansion of Julius Nyerere International Airport. All these displacements have had a huge impact on the respective families and their communities. These are just a few examples from one sector of the economy which has been growing fast and attracting FDI. Similar practices and experience can be found in other sectors of the economy, such as mining and agriculture, where large-scale investment has been made in the production of crops for bio-fuel. Furthermore, experts who are entitled to formulate policies, regulations and laws to guide investment practices bypass local needs and priorities. Consequently, some have proposed policies, regulations and laws that undermine community and national development instead of supporting it. There are cases where regulations and laws prepared by the respective authority tend to jeopardize and undermine local people’s development endeavours in order to pave the way for FDI. Sambaiga et al. (2011) point out that the global market through FDI has resulted in an increasing number of users and managers of coastal resources, giving rise to conflict between them. This situation has been undermining the sustainability of coastal resources as well as coastal livelihoods. For instance, in 2009, a proposed bill from the Ministry of Natural Resources and Tourism faced resistance from members of parliament due to its weakness in promoting local development. The bill was rejected and the ministry directed to make some changes. It was also criticized by the Tanzania Natural Resource Forum of 2009, which argued that: the content of this act is not favourable to increasing local income from wildlife or local participation in wildlife management, or to promoting good governance of natural resources. The act also will likely increase conflicts between local communities and the government, as have recently occurred in Loliondo, over the tenure and management of land and resources where wildlife is found. In particular the act focuses on increasing the area of land and authority over the land under the

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Chapter Six jurisdiction of the Wildlife Division. It gives the Directory of Wildlife authority to prohibit all farming and livestock grazing in Game Controlled Areas. This may directly impact the livelihoods of hundreds of thousands of Tanzanian citizens living in these Game Controlled Areas if safeguards are not carefully followed, because Game Controlled Areas and village lands overlap in most parts of the country. The act is likely to increase conflicts over land use and land tenure, and is contrary to the MKUKUTA objective of harmonizing sectoral laws in order to reduce conflicts. (Tanzania Natural Resource Forum 2009, 6)

Comparative and competitive advantages Comparative advantages are God-given natural resources. For Tanzania, these include but are not limited to national parks, minerals, the ocean, lakes and rivers, mountains, fertile soil and many others. Competitive advantages are man-made ones, such as skills, infrastructure or education. Tanzania has one vital competitive advantage, namely peace and political stability. This was not given to us by God, but rather people who had vision worked very hard for it. In this regard, the late Baba wa Taifa, Mwalimu Nyerere, played an important role. Other countries have little in terms of natural resources, but manage to compensate for this. An example is South Korea, which is amongst the most competitive countries in the world. They are the main producers of steel, although they do not have coal, and so they started to import raw materials from Australia. “Its comparative advantage was growing rice [...] the Korean government realized that if it was to succeed in becoming developed, it had to transform its economy from agriculture to industry” (Stiglitz 2006, 70).This transformation in Korea was the result of a clear vision for the country’s development and its position internationally. Its economic success was internally driven by home-made trade and economic policies. My discussion with senior officials from the public institutions dealing with trade and investment in Tanzania revealed that local experts do not believe in FDI as a facilitator of development. When elaborating on his concern about the contribution of FDI to national development, one official made the following comments: No country has been developed by investors. Countries such as China, Indonesia, Japan, Brazil, India and South Africa were not developed by foreign investment. We need investors but we need to define the rules of the game. China produced cheap goods but it was competitive at that time, labour costs were low, they had basic technology and basic industry even in the village—the policy of Mao for self-reliance. They lacked investment in the sense of transfer of technology.

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Globalization and Development FDI does have the potential to facilitate the development of host countries. However, that is not obvious. FDI is capital owned by multinational corporations which make their fortune from a host country; they want to do business, and doing business means making a profit. They are not charity organizations. Countries like China, India, Brazil, Malaysia, Singapore and Taiwan to some extent managed to attract FDI, which in turn facilitated the development of their countries. That did not happen accidentally, but was a result of economic and trade priorities and policies which were made by them to guide FDI. Development experts and scholars such as Joseph Stiglitz have suggested some measures to be taken by host countries to make globalization work for their development. For instance, Stiglitz (2006, 198–210) suggests the following reforms: corporate social responsibility, limiting the power of corporations, improving corporate governance, global laws for a global economy and reducing the scope of corruption.

Conclusion One of the changes in the current wave of globalization is the nature of international trade and the role of FDI. Globalization creates both opportunities and risks for host countries. Whether a country will profit or lose in this process largely depends on the ideologies guiding its development policies and priorities. Since independence, Tanzania has adopted two major ideologies in relation to development, which have consequently shaped its development priorities, policies and practices. The first ideology was African socialism, inaugurated by the Arusha Declaration, which resulted in the establishment of Ujumaa villages and the formulation of a code of conduct for civil servants, who it was thought would collaborate with ordinary people to design, implement and manage development activities. From the 1980s, Tanzania shifted its development ideology from socialism to neo-liberalism and the free market economy under the umbrella of the Zanzibar Resolution. This shift consequently determined its priorities, policies and practices. It is evident in the world that, on the one hand, some countries have managed to use globalization through FDI to promote and facilitate their development, whereas others have not managed to translate their integration in the global market into prosperity. This chapter does not deny the contribution globalization and FDI make to local development, but it argues that these are not charity initiatives as they are guided by market forces. FDI is managed by private

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individuals (owners and shareholders), who are business people who use FDI to generate a profit. There are concrete examples, as discussed in this chapter, which show that globalization and FDI have been undermining local development initiatives. This is also supported by both ordinary people and some local senior officials, who are experts as well as managers of development initiatives. An official from one of these public institutions said: “If we want to make progress as other countries like those of Western Europe, USA, and Asia did, we should do what they did and not what they tell us to do.”

References Balla, A. S., ed. 1998. Globalization, Growth and Marginalization, London: Macmillan Press. Bilton, T. et al. 2002. Introductory Sociology. Fourth Edition. New York: Palgrave Macmillan. Easterly, W. 2002. The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. London: MIT Press. Komba, D. 1995. “Contribution to Rural Development: Ujamaa and Villigization.” In Mwalimu: The Influence of Nyerere, edited by C. Legum and G. Mmari, 37–38. Dar es Salaam: Mkuki na Nyota. Msambichaka, A. L., E. N. Mwamba, and J. O. Mashindano. 2006. “Making Globalization Work: Measures to Attract Foreign Direct Investment to Tanzania.” In Globalization and Challenges for Development in Tanzania, edited by A. L. Msambichaka, E. N. Mwamba, and J. O. Mashindano. Dar es Salaam: Dar es Salaam University Press. Mshomba, E. R. 2000. Africa in the Global Economy. London: Lynne Rienner Publishers. Mukandala, S. R. 1994. “Whither Ujamaa: Ideological premises of the 1990 Elections.” In Liberalization and Politics: The 1990 Election in Tanzania, edited by S. R. Mukandala and H. Othman, 56–65. Dar es Salaam: Dar es Salaam University Press. Nohlen, D. and Nuscheler F. 1993. “Was heißt Entwicklung?” In Handbuch der Dritten Welt: Grundprobleme, Theorien und Strategien, edited by D. Nohlen and F. Nuscheler. Bonn: Verlag J. H. W. Dietz Nachf. Rutasitara, L. L. 2006. “Enhancing Tanzania’s Capacity to Export.” In Globalization and Challenges for Development in Tanzania, edited by A. L. Msambichaka, E. N. Mwamba, and J. O. Mashindano. Dar es Salaam: Dar es Salaam University Press.

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Sambaiga, R.F. et al. 2011. “Global Markets and Coastal Resources Management in Tanzania.” UTAFITI 8. Shivji, G. I. 1994. “Electoral Politics, Liberalization and Democracy.” Liberalization and Politics: The 1990 Election in Tanzania, edited by S. R. Mukandala and H. Othman, 13–35. Dar es Salaam: Dar es Salaam University Press. Shivji, G. I. 2006. Let the People Speak: Tanzania Down the Road to NeoLiberalism. Dakar: Codesria. Sigalla, L. H. 2006. “The Politics of Globalization in Tanzania: A Dialectical Perspective.” Journal of African Review 1 & 2. Sigalla, L. H, F. R. Sambaiga, V. Simon, and E. Shemaghembe. 2011. Global Markets and the Livelihoods of Coastal Communities in the WIO countries: Implication for sustainable Coastal Resources Management. Draft Regional Report submitted to WIOMSA for international review, July 2011. Stiglitz, J. 2002. Globalization and its discontents. London: Penguin. —. 2006. Making Globalization Work. London: W.W. Norton. Tanzania Natural Resource Forum. 2009. How Tanzania’s Natural Resources Contribute to Poverty Reduction: An Analysis of MKUKUTA outcomes (2005–2009) related to forest and wildlife resources as a contribution to the MKUKUTA review. Policy Brief 10.9. http://www.policyforum-tz.org/files/Mkukutabrief.pdf United Republic of Tanzania (URT). 2007. The Wildlife Policy of Tanzania. Produced by the Ministry of Natural Resources and Tourism, Dar es Salaam, Tanzania.

CHAPTER SEVEN PROMOTING TRADE COMPETITIVENESS IN DEVELOPING COUNTRIES: A CASE OF NATURAL RESOURCES AND COMPETITIVE ADVANTAGE AMINA AKIDA

Introduction Tanzania has been implementing the trade liberalization policy since its introduction in 1987. Emphasis was placed on the participation of the private sector in various management and production activities, including in the forestry sector. To enhance participation, supporting instruments were put in place and an enabling environment was created. The instruments include policy incentives and the removal of trade distortions in the production and marketing of forest products, to ensure marketdetermined prices. Since trade liberalization and other policy measures were introduced in the Tanzanian forestry sector, there has been growth in the trade, both domestic and foreign, of forest products, characterized by an increased share of total trade. There has been an increase in the production, distribution and marketing of forest products in Tanzania. In addition, trade and investment liberalization policies in other sectors and a general change in economic activities have also influenced activities in the forestry sector. Construction activities in Tanzania depend upon a significant amount of forest products as input and materials. In recent years, such activities have increased, triggering further demand for forest products and thereby putting pressure on forests. In terms of usage, various estimates have indicated that fuel wood extraction represents the largest use of forest products (estimated at over 60 percent). The trade in forest products, which mostly involves harvesting timber from both natural and plantation forests, contributes to sustainable

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development in Tanzania. The main traded forest products are timber products, of which roundwood constitutes about 80 percent and sawn wood accounts for 14 percent, the remaining 6 percent being composed of strips, pallets, off-cuts, sleepers, slabs and billets (Milledge et al. 2007). Trade flourished due to increased demand from overseas markets, accessibility of the resource and favourable profit margins. As a result of globalization, there has been huge expansion of the timber trade, because its management is weak and the law is not enforced. The objective of the chapter is to focus on the trade in forest products and services, the influence of the market and the impact of globalization on natural resource management.

The Natural resource Base Tanzania has outstanding natural resources, including land, forests, wildlife, minerals, water and fish stocks. Natural resources are defined as “stocks of materials that exist in the natural environment that are both scarce and economically useful for production or consumption, either in their raw state or after a minimal amount of processing” (WTO 2010, 46). Forest products are also on the list, despite the fact that they may have come from cultivated plantations and woodlots. Natural resources goods and services can be traded in the local environment and internationally, and are factors of production that yield a certain output. Tanzania is endowed with diverse and rich forest resources including woodlands, montane forests, plantation forests and mangroves, all of which are rich in biodiversity, providing environmental services to both humans and wildlife. Forest resources contribute to a great extent to the subsistence of almost the entire population in rural areas and to the alleviation of poverty of both rural and some urban dwellers. About 87 percent of the country’s rural people depend on forest products like charcoal for their livelihood. Forests provide over 90 percent of Tanzania’s energy supply and 75 percent of its construction materials. Forests are essential for the protection of major water catchment basins and are the source of most traditional medicines. The logging and timber trade provides some of the most immediate economic benefits from forests in terms of generating government royalties, private investment, rural incomes from the sale of forest products and employment. Recently, the forest sector has been entrusted with climate change mitigation targets that are of global importance. This has put forest issues higher on the political agenda than maybe ever before. Forest products embody and recycle large amounts of carbon, and trade moves these products, and therefore the

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carbon sink that they represent, around the world. This complex function will undoubtedly remain the subject of lively discussion about shaping the future role of forests in low-carbon economies and in the run-up to a global climate accord. The country has about 35.3 million hectares of forests and woodlands. Out of this, about 18.3 million hectares are reserved forests, of which 1.6 million hectares are set aside for water catchment, biodiversity and soil conservation, and 2 million hectares are wildlife protected areas. Over 80,000 hectares of the reserved forests comprise 16 plantation forests. Over 17 million hectares of forest are on general land with no properly defined management regime. Severe deforestation and degradation is occurring on general land.

Trade in forest products Natural resources, especially forests, have a close relationship both with the livelihoods of rural people and the urban economy. Forest resources form the economic basis for various sectors of the domestic economy, and are therefore involved in trade in an indirect way through the trade in wood for building materials, for making paper, charcoal and furniture, for energy and for export among others. As a natural resource, forests are often the reason for trade rather than tradable goods in their own right. Trade in hardwoods from southern Tanzania dates back to colonial times, with exports to the Far East and Europe through the ports of Mtwara, Lindi and Kilwa. During that time, Dalbergia melanoxylon was the principal species traded, with missionaries buying logs in the districts of Songea, Nachingwea and Lindi. The timber trade in Tanzania has increased over the past decade, especially trade with external markets. According to Milledge et al., “uncontrolled timber harvesting in southern Tanzania grew rapidly starting in 2003, largely because of increasing overseas demand, especially from China” (2007, 1). Heavy exploitation of forest resources has occurred in most parts of the country which have an abundance of forests, especially woodlands. Forest inventories in 2005 revealed that four districts with the highest density of timber resources are in southern Tanzania, namely Tunduru (12.2 m3/ha), Kilwa (10.5 m3/ha), Liwale (5.5 m3/ha) and Rufiji (3.8 m3/ha). The extent of exploitation in various parts of the country varied over time depending on the accessibility and availability of the preferred species. For instance, during the period from 2000 to 2005 there was an increase in the timber trade in southern parts of Tanzania, especially Rufiji district across the Rufiji river,

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which was not accessible before infrastructure development. The most commercially valuable species include Dalbergia melanoxylon, Swartzia madagascariensis, Pterocarpus spp., Milicia excelsa, Millettia stuhlmannii, Khaya anthotheca, Combretum imberbe, Afzelia quanzensis and Bombax rhodognaphalon. Rufiji District accounted for 85 percent of all the wood harvested before the completion of Mkapa bridge, with over 80 percent of the commercial species comprising Millettia stuhlmannii, Baphia kirkii and Swartzia madagascariensis (Milledge et al., 2007). Both local and central governments benefit from these natural resources, through the sale of timber, recreation, and environmental values such as carbon sequestration. During 2002–2003, 40 percent of all revenue came from natural forests. Reports from southern Tanzania indicate that four districts with forest resources received revenue amounting to TZS 116.24 million (equivalent to US$110,400) in Rufiji, TZS 111.96 million (equivalent to US$106,300) in Kilwa, and TZS 44.02 million (equivalent to US$41,800) in Liwale during 2003–2004. Hence, forests have the potential for alleviating poverty and enhancing social development. The adoption of trade liberalization measures has facilitated increased exports in forest products, composed mainly of raw products, particularly logs. Trade liberalization policies encourage the domestic processing of forest products before they are exported, which adds value and discourages intensive harvesting that causes deforestation. As stated in the national forest policy on trade, trade liberalization policies in the forestry sector have encouraged the expansion of production and trade in forest products, thereby accelerating the macroeconomic contribution of the sector […] Other aspects of positive results of implementing trade liberalization are increased importation of inputs, growth in sectoral investment, and increase in value addition, contribution to GDP and employment. (Ministry of Natural Resources and Tourism, 1998)

Increased trade in forest products has supported economic growth and the eradication of poverty in a number of emerging countries. In Tanzania, the implementation of trade liberalization policies has contributed to increased exports in the forest sector. For example, the sector’s contribution to total trade was 3–4 percent of total exports, but after trade liberalization, the contribution jumped to about 11 percent of the country’s exports. In addition, there is increased investment in the sector and value addition of forest products.

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Forest products Markets Domestic market Urban centres remain the main trading centres for products harvested from forests. For many reasons, Dar es Salaam is a major one and is the primary destination for timber products, including round and sawn wood from all the other regions. In a study conducted in 2005, Milledge et al. (2007) reported that Dar es Salaam was a major destination for many other wood products to be sold in the domestic and export market, including furniture, poles, off-cuts and charcoal. Further, about 87 percent of all sawn wood and all processed Dalbergia melanoxylon for export was transported to Dar es Salaam before being transported on to other destinations and users. Another leading market centre for some forest products from mainland Tanzania is Zanzibar, where wood products are transported by sea for local consumption and for export. Zanzibar is reported to be a significant market mainly for planks and mangrove poles. It is also said to be a staging post for shipping timber products from mainland Tanzania and Mozambique to overseas destinations. The main products in the local market include wood for construction, furniture, fixtures and other products as well as fuel-wood.

Export Market During the 1990s, the export market for Tanzanian hardwood expanded, enticing more people to invest in timber processing and exporting. The Ministry of Natural Resources and Tourism’s National Forest Policy (1998) reported the presence of disorganized marketing systems and channels that hinder trade in forest products. Due to ineffective controls, the timber trade became very profitable and many people entered the business mainly to export roundwood to lucrative overseas markets. Access to international markets has grown with China’s emergence as a major player in the global timber trade and their increasing interest in hardwood supplies from East Africa. Tanzania was the continent’s sixth largest timber exporter to China in 2005, increasing by almost 1,400 percent in value since 1997. The Asian market is the fastest growing importer of Tanzania’s indigenous hardwood products, both unprocessed and semi-processed. A professor of natural resources assessment at Sokoine University of Agriculture in Morogoro, Tanzania, stated that “China is a market that is impossible to satisfy and the Chinese will stay in Tanzania unless they get

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other alternatives” (Barclay 2007). Chinese carpentry companies transform much of the wood into furniture and other wood products for export to the United States and Europe. China’s growing hunger for timber may wipe out much of Tanzania’s commercially valuable forests in two decades. Many timber products were exported between 2002/2003 and 2004/2005, although there were many unrecorded exports occurring in the timber industry due to tax evasion and illegal procurement of the timber. Table 1 shows that exports were dominated by a range of hardwood and softwood products, including logs, sawn wood, billets, chips and manufactured products. A total of TZS 94.8 million (US$83,200) was realized by the government from exports of timber products between July and December 2005. Roundwood and semi-processed timber accounted for over three-quarters, amounting to TZS 74.4 million (US$65,300). Products

Logs

Species

Quantity

Swartzia magascariensis Tectona grandis

846.73

Units

Primary destinations China (100%)

m3

UAE (99%) and India Various China (76%), hardwoods Taiwan (7%), 4,282.39 Sawn UAE (6%), wood, Thailand (3%) m3 billets and Softwood sawn UAE (76%), 19,671.49 chips wood South Africa (8%) Sandalwood 116.51 India (100%) carvings Dalbergia 10,310.29 Kgs India, USA, UK, and other melanoxylon China, Germany, 77.05 m3 finished Italy, Kenya, 5,513.00 pcs products South Africa (31 countries altogether) Table 7-1 Timber exports from Tanzania, July 2005 to January 2006. 8,930.30

Source: from Milledge et al. (2007).

Trade Routes Timber products are transported from the forest to intermediary landing sites or ports and subsequently moved from the landing site to the destination (for example a sawmill, container terminal, port of exit, retail

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outlet, etc.) The means of transport include carrying on foot, bicycle, motor vehicle, boat or aeroplane. Whilst tractors, carrying on foot or bicycles were used almost exclusively to move roundwood from the forest to village landing sites in southern Tanzania, vehicles (mostly semi-trailers and full trailers) or boats of various sizes were used to transport sawn and roundwood to the final destination prior to sale, further processing or export. Timber products are mainly transported by road to nearby countries and by ship to distant markets. The destinations of most wood products from Tanzania include China (which imports most), India and Japan, as well as European and Middle Eastern countries. Asia and the Middle East are currently the main importers of unprocessed and semiprocessed timber products from Tanzania, with China the fastest growing importer of indigenous hardwoods. China accounted for all indigenous hardwood logs and three-quarters of processed hardwoods (sawn wood and billets) exported between July 2005 and January 2006. India is also emerging as a major importer of timber products, including all sandalwood exported in the last half of 2005.

Analysis of Competitive Advantage of Trade in Forest Resources Competitive advantage is the ability gained through attributes and resources to perform at a higher level than others in the same industry or market (Christensen and Fahey 1984; Kay 1994; Porter 1980; cited by Chaharbaghi, and Lynch 1999, 45). There are two basic types of competitive advantage, cost advantage and differentiation advantage. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Using the resource-based view, there are key assumptions associated with competitive advantage of resources, which are the potential of the resources for the sector, the ability of the resources to meet the criteria of being valuable (through value-creating strategy), rare (in that the price will reflect the expected discounted future above-average returns) and inimitable with causal ambiguity. As far as forest resources in Tanzania are concerned, the assumption applies to the trade in forest products due to the fact that the country is rich in them. Competitive advantage in natural resources can further be related to key features of natural resources in the global context relating to their use, especially trade, which are:

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(i)

Exhaustibility. Forests are renewable resources, although their reproductive capacity has limitations and may decline,but they can provide yields for an indefinite time. The sustainable management of forest resources rests on the capacity to monitor the evolution of stocks and take corrective action in cases of significant degradation or decline. (ii) Uneven distribution across countries. Tanzania is one of the countries in Africa that is endowed with vast forest resources due to being near the equator with favourable growing conditions. Most importing countries are eager to obtain natural resources from foreign suppliers, but exporting countries may be reluctant to allow their resources to flow freely to other nations for a variety of reasons, including fiscal needs, the desire for economic diversification through additional processing of raw materials, ensuring adequate domestic supplies, and protecting the environment. (iii) Negative external consequences in other areas. The harvesting and trade in timber products in Tanzania, especially the southern regions, has been affected by overharvesting and uncontrolled use, which leaves behind scars of degradation. The development of the transport system in southern Tanzania has facilitated movement in this part of the country, thus causing over-extraction of forest products to satisfy markets in, for example, China. On the other hand, lack of ownership rights over a common pool of resources leads to depletion of those resources. According to the World Bank’s World Development Indicators, countries in South America and Africa experienced the biggest decline during 2005, while other regions recorded smaller drops, or in some cases small increases. Europe saw its forest area increase more than any other region (FAO 2006). Tanzanian hardwoods have commanded high prices internationally, compared with timber from West and Central Africa. A dynamic domestic market is nowadays becoming an important factor in attracting foreign investment, and many emerging economies have bustling urban markets dealing in high-quality forest products. Unsustainable harvesting has led to environmental degradation and the loss of commercially viable hardwoods in many areas. Disturbing trends in the forestry sector are certainly not unique to Tanzania; other African countries including neighbouring Mozambique and the Democratic Republic of Congo are reportedly experiencing similar dynamics (Standing et al., 2006). At the global level, considerable debate

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revolves around the role played by major importing, processing and consuming nations in stimulating the scenario currently unfolding in Tanzania. Concern over uncontrolled, unsustainable and illegal timber harvesting and trading has certainly gained momentum in international circles. Due to the uneven distribution of natural resource deposits across countries, the pattern of exports is quite different from one region to another. In some regions, for example the Middle East, Africa and the Commonwealth of Independent States, resources represent a significant proportion of merchandise exports, while others, such as Asia, Europe and North America, have more diverse export profiles. The total value of Africa’s exports of natural resources was just under US$406 billion, representing 73 percent of the continent’s exports. Leading importers of natural resources include Japan (imports worth US$350.2 billion or 9.1 percent of world trade) and China (US$330.3 billion or 8.6 percent). For example, reported timber exports from Tanzania to all destinations during a three-year period ending in 2005 totalled around 19,300 m3, whilst import statistics from one destination alone, China, showed a considerably higher value, exceeding 108,500 m3. The value of logs from Tanzania has continued to increase locally in addition to staying high compared with competitors in other African countries. The revenue from log exports steadily increased between 2002/2003 and 2004/2005, with average unit values rising from US$251 to US$330 per m3 (Table 7-2). Comparable prices for logs exported to the international market from West Africa were considerably lower (Table 7-3). Product Hardwood roundwood Hardwood sawn wood

FOB Values US$251–330 per m3 US$275–570 per m3

Product Hardwood flooring strips Softwood sawn timber

FOB Values US$600–1200 per m3 US$130 per m3

Table 7-2 FOB prices (US$) for selected timber products shipped from Tanzania.

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Product Hardwood roundwood Hardwood roundwood Hardwood sawn timber Hardwood sawn timber Hardwood plywood and veneer

Market Domestic

Lower value US$31/m3

Upper value US$175/m3

International

US$94/m3

US$200/m3

Domestic

US$106/m3

US$260/m3

International

US$180/m3

US$855/m3

International

US$235/m3

US$305/m3

Table 7-3 Price comparison of different hardwood products sold from West Africa.

Impact of Trade on natural resources as a result of globalization The government of Tanzania intended to attract more investors to come to the country and invest in the forest industry for the easier collection of revenue and to widen the scope of employment opportunities, but longstanding unsustainable harvesting had led to environmental degradation and the loss of commercially viable hardwoods. Over the past two centuries—and especially over recent decades—there has been a dramatic expansion in the volume and range of natural resources traded internationally. At one time only the most valuable natural resources were shipped to distant markets. This change is due to globalization. Globalization is perceived to be a response to the world’s economic order, with the reduction in barriers to international trade, such as tariffs, export fees, and import quotas. Its goal is to increase material wealth, goods, and services through an international division of labour by efficiency, catalyzed by international relations, specialization and competition. It describes the process by which regional economies, societies and cultures have become integrated through communication, transportation, and trade. An aspect of the world which has gone through the process can be said to be globalized. A number of factors have contributed to the “globalization” of natural resources, including population growth, colonization, industrialization and the rise of developing countries. In addition, globalization has an effect on the timber trade from Tanzania in terms of expanding markets, which have

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been on the increase since the early 2000s. While this seemed to be a positive trend, in reality, the combined effects of globalization, decentralization and market-based development—perhaps without the necessary attention being given to the development of forest-based industry and governance issues—led to an increase in poorly controlled timber exploitation in southern Tanzania. In addition, globalization has injured the environment in the forestry sector through the over-harvesting of forest products. Milledge et al. (2005), reported that between 2000 and 2004 the commercial logging of coastal forests in southern Tanzania of species such as Swartzia madagascarensis and Millettia stulhmanii was alarming, and the export of round logs was on the increase. The increase in the log trade in the southern regions of Tanzania was also accelerated by infrastructure development in the form of the opening of Mkapa Bridge. Some evidence of the unsustainability of the timber trade include: (i)

Increasing trade in lower-value species. Over-harvesting of the higher-value hardwood species (Class I and II) has forced traders to exploit a larger number of alternative species, mostly Class V (for example Hymenaea verrucosa, Trichilia emetica) in, for instance, Rufiji District. On the other hand, the harvesting of the most valuable hardwoods has increased markedly. For example, over 80 percent of licences issued by districts in Lindi Region during 2001 were for Class I and II species of Pterocarpus angolensis, Swartzia madagascarensis and Afzelia quanzensis). (ii) Change in harvesting areas. Referring to a study on the timber trade in southern Tanzania, historical trade data shows a change in harvesting areas, with the trade moving southwards as areas became over-exploited. Shifts in harvesting areas were most pronounced for two highly targeted species, Pterocarpus angolensis and Dalbergia melanoxylon, to the extent that very few commercially viable stands remain in Rufiji District. A comparison of the area harvested between 2001 and 2003—just before the bridge was opened—showed a marked shift in harvesting south of the Rufiji River, as traders anticipated transport flexibility. Rampant harvesting has affected the health of the ecosystem. Deforestation is already impacting water resources and causing soil erosion, as well as threatening habitat loss and species extinction. It is also causing outbreaks of fire and a decline in biodiversity in many parts of the

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country. TRAFFIC predicts that most commercially valuable trees in two southern districts may be gone within twenty years.

Institutional and Regulatory Framework for trade in natural resources Key instruments for forest governance, including revised forest and land policy and legislation, participatory land use planning initiatives and various decentralization reforms. Realizing that trade in timber products is unsustainable, the Tanzanian government has reviewed the procedure for issuing licences for harvesting and transporting forest products, and has introduced a number of further measures to attempt to regulate the timber trade: x Empowerment of villagers to manage forests through participatory forest management. x Ban on exports of all types of logs in place since July 2004. x National forestry inventory conducted in 2005, and ongoing development of district harvest plans. x Guidelines on Harvesting of Forest Products and formation of District Forest Harvesting Committees gazetted in 2006. x Establishment of Forest Surveillance Unit in 2005/2006. x Strengthening of checkpoints and improved security of documents used for harvesting forest produce. x Introduction of scanning of forest product exports. x Countrywide assessment of sawmills in 2005. x Establishment of a forest resource database. x Development and implementation of an improved forest revenue collection strategy. In addition to these approaches, it seeks to enforce compliance with various regional and international conventions and agreements on the timber trade to control and reduce degradation of forest resources.

Conclusion The timber industry needs to be properly regulated and advantage must be taken of the existing bilateral trade opportunities with countries such as China. Proper enforcement in the forestry sector will benefit the whole nation. However, long-term strategies in relation to trade are needed to

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ensure that the benefits are sustainable. Effective timber trade management is required not only to help ensure sustainable and equitable economic growth derived from the forestry sector, but also to help secure forest integrity in general.

References Barclay, E. 2007. “China Spurring Illegal Timber Trade in Tanzania.” National Geographic News, December 21. http://news.national geographic/news/2007/12/071221-tanzania-logging.html. Chaharbaghi, K. and R. Lynch. 1999. “Sustainable competitive advantage: towards a dynamic resource-based strategy.” Management Decision 37 (1): 45–50. FAO. 2006. Global Forest Resources Assessment 2005: Progress towards sustainable forest management. (FAO Forestry Paper 147.) Rome: FAO. Milledge, S. A. H. and B. K. Kaale. 2004. Bridging the Gap: Linking Timber Trade with Infrastructure Development and Poverty Eradication Efforts in Southern Tanzania. Dar es Salaam: TRAFFIC East/Southern Africa. Milledge, S. A. H. and R. Elibariki. 2005. “Green Gold: Ongoing efforts towards preventing illegal harvesting and exports of Tanzania’s most valuable hardwoods.” The Arc Journal 17. Milledge, S. A. H., I. K. Gelvas, and A. Ahrends. 2007. Forestry, Governance and National Development: Lessons Learned from a Logging Boom in Southern Tanzania. Dar es Salaam: TRAFFIC East/Southern Africa / Tanzania Development Partners Group / Ministry of Natural Resources and Tourism. Ministry of Natural Resources and Tourism. 1998. National Forest Policy. Dar es Salaam: Ministry of Natural Resources and Tourism. Standing, A. and H. van Vuuren. 2006. Who Cursed Natural Resources in Southern Africa? Cape Town: Open Society Initiative for Southern Africa, Institute for Security Studies (ISS) Corruption & Governance Programme. World Bank. 2008. Putting Tanzania’s Hidden Economy to Work: Reform, Management and Protection of its Natural Resource Sector. Washington, D.C: World Bank. WTO. 2010. World Trade Report 2010: Trade in Natural Resources. Geneva: World Trade Organization.

CHAPTER EIGHT THE RELATIONSHIP BETWEEN E-GOVERNMENT STATUS AND GLOBAL COMPETITIVENESS: EVIDENCE FROM 2010 COUNTRY DATA ULINGETA O. L. MBAMBA

Introduction Competitiveness, whether of an organization (Lee and Karpava 2011; Yeo, Roe, and Dinwoodie 2011; Shafaei, Shahriari, and Moradi 2009; Hoffmann et al. 2011) or a country (Ille and Chailan, 2011; Porter 1990), has received a lot of attention over the years because of its advantages, including profitability of organizations (Porter and Miller 1985), strength in negotiations (Porter and Miller 1985), and knowledge creation (Paiva, Gutierrez, and Roth 2012). Several studies have attempted to explain how an organization or country can become competitive and several factors have been identified in this regard. However, over the quarter of a century since the publication in 1985 of Michael E. Porter and Victor E. Millar’s landmark article, a lot of changes have occurred in business, including the rise of China as the world’s second-largest economy, the rise of globalization, the signing of several treaties, the growth of economic blocs like the East African Community, the European Union and others, as well as developments in information technology, such as wide usage of the internet and social networking systems and the possibility of doing business online (e-business, e-government, e-learning, and so on). Following its publication, several articles attempted to further define the concept from the information and communications technology (ICT) perspective. However, the definition of ICT has changed significantly and has developed in different ways. Many organizations and countries have embraced ICT with enthusiasm, hoping that it will help them to prosper. What is being witnessed is contrary to what was advocated by those

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publications. The concept of adopting ICT to take advantage of the opportunities it presents has been widely discussed. Regarding the impact of ICT on competitiveness, studies have explored a number of issues. Some have focused on technology and how it can help countries and organizations become competitive (Ahmad and Schroeder 2011), while others have looked at management (Carneiro 2000) as it is argued that technology is almost perfect and what is required is management’s ability to exploit the potential of ICT. However some scholars have wondered whether ICT really has improved the life of the poor (by facilitating leapfrogging) or made them worse (creating a digital divide). Those who go for leapfrogging argue that several stages of development have been skipped by developing countries due to ICT, while those who argue for the digital divide posit that in order to exploit the opportunities presented by ICT, countries must have an environment conducive for that to happen, which in most cases developing countries do not have. For example, ICT can significantly reduce corruption by removing the need for a middleman. However, people complain about corruption in every country, whether developed or underdeveloped, and over the years other issues concerning ICT have emerged, among which is the level of e-government. The objective of this study is to explore the relationship between countries’ level of e-government and their competitiveness. Its main assumption is that the more use is made of ICT, especially in government, the more efficient and effective it becomes. ICT can remove government bureaucracy and geographical disadvantages or remoteness, and as a consequence the country will become competitive.

E-Government E-government is a concept that means different things to different people. Business people might link it to the government investing in electronic means to facilitate the smooth operation of businesses. Political scientists may define e-government in terms of enhancing democracy by involving more people in the decision-making process through the use of ICT (Lenihan 2002). This study defines e-government as the application of advanced ICT to deliver public services (Holmes 2001). It is argued that citizens’ expectations exceed what governments are offering (Pai and Yeh 2008). African governments have limited resources and facilities for investing in e-government (Mnjama and Wamukoya 2007). The importance of e-government has received a lot of attention in recent years. Its main aim is to exploit the potential of ICT and other

Relationship between E-Government Status and Global Competitiveness 119

supporting technologies to improve government services, including its relationship with citizens, business and the state (Kolsaker and Lee-Kelley 2008). A further aim of e-government is to make the government efficient, effective and customer-oriented. This can be done by government departments using ICT and its online system to provide service delivery and to ensure the public’s participation in governance, policy development and implementation (Ndou 2004). A better level of e-government facilitates public service delivery round the clock, thereby reducing the need to physically queue for government services like registration, requests for information or services, filling in returns, sending applications amongst other things. E-government makes these services transparent so that citizens can know about the decisions that have been made and why, and it provides the government with effective systems for collecting taxes, tracking services and so on. In turn, it makes government services more accessible (citizens can access them from anywhere), available (accessible anytime) and affordable (cheap), while at the same reducing corruption. Through an e-government system, the rule of law is made simple and possible, and self-policing and integrity increase because all people will have the same information at the same time. Hence, the implementation of accountability and transparency can be simplified. For example, with a good national identification system, which is part of e-government, it would be possible to track all citizens, thereby improving tax collection. In business, e-government handles all the issues discussed above. Egovernment may facilitate the transfer of knowledge and available skills in the country, and aids the formation, formalization and registration of businesses. It is therefore expected that the higher the level of egovernment, the greater the competitiveness of a country. The link between business and competitiveness is to a great extent influenced by those who are running government (Moon and Norris 2005). For example, the European Union recognizes the importance of egovernment and has issued directives on several issues like public services and governments, to influence its implementation (EU 2011). Developing countries do not lag behind in this; for example, the Republic of Kenya has a website which links to a number of services that are available online.1 At the same time, in the United Republic of Tanzania there are several systems that attempt to move towards e-government. These include a register of permanent voters, a national identification system, a births and deaths registration system provided by RITA, a taxpayer identification number system (TIN), and so on. When the level of e-government increases, so does transparency, and continuous interaction and 1

See http://www.e-government.go.ke/.

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communication between the government and its citizens contribute further to the decision-making process (SADC e-Readiness Task Force, 2002). Mutula (2008) argues that developing countries must invest in ICT infrastructure and enhance a legislative and policy framework, and further notes that this would enable the country to effectively compete with developed and transitional nations, not only in e-government, but also in the international economy (implying competitiveness). This can only further be facilitated by education (Mutula 2010).

Competitiveness Changes in world trade over time have caused some organizations and countries to benefit, while others have gone into decline. These changes have been partly fuelled by competitiveness. Competitiveness generally indicates to what extent one organization or country is able to outperform others in the area under consideration. The concept of competitiveness is an old one but is still valid for today’s world. To a great extent, competitiveness is trade related. Although a number of scholars and studies have attempted to explain how an organization or a country becomes competitive, there are still no uniformly accepted ways of bringing this about. Over the years, the importance of ICT has received a lot of attention in terms of creating competitiveness (Porter and Miller 1985). Two factors affect competitiveness: natural factors and man-made factors. Natural factors include nearness to raw materials or markets, natural endowment, and others, while man-made factors include innovativeness, productivity, management issues and others. Therefore, one can define competitiveness as the ability of an organization or nation to offer services or goods locally or globally that are competitive (that is, preferred by the market) at a profit. Countries invest a lot to make them competitive; examples could include sound microeconomic policies and a favourable legal and political environment. However, for these to work one has to evaluate the impact of what has been intended. For example, some policies that make a country competitive may have a negative impact on other issues in the same country. Mamoya (2011) explored a cooperation-driven stage in the traditional framework of a country’s competitiveness. The research used data from a selected country’s competitiveness report, and found the critical success factors to be innovation and technology development (Mamoya 2011). These factors can be linked to e-government in predicting the competitiveness of a country.

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Some competitiveness studies have used a country’s data over thirty years to establish how competitiveness is created and maintained, on the grounds that such studies require more time (Waheeduzzaman 2011). Waheeduzzaman (2011) used a longitudinal study to compare G7 and big emerging markets. The impact on competitiveness of particular issues has been the subject of numerous studies. Amongst these are innovation (Carneiro 2000; West 1992; Harari 1994;), logistics and supply chain (Yeo, Roe, and Dinwoodie 2011; Thai and Grewal 2005), ICT (Katos 2009), economic performance, technology development, human resources and management capability (Lin et al. 2004; Lall 1990).

Method Used to Find Relationship In order to compare the relationship between competitiveness and egovernment, data from the global competitiveness index (GCI) provided by the World Economic Forum (measured on a scale of 1 to 10) and the egovernment index (EGI) published by the World Bank (measured on a scale of 0 to 1) were used. The CGI is based on the twelve pillars of competitiveness, while the EGI is based on three dimensions. The research used data published in 2010. The twelve pillars of competitiveness are divided into three main factors. The first is the factor-driven economy (also known as basic requirements). This incorporates institutions, infrastructure, macroeconomic environment, health, and primary education. The second embodies efficiency-driven economies (also known as efficiency enhancers). They include higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, and market size. The third factor involves innovation-driven economies (also known as innovation and sophistication factors). They include business sophistication and innovation. The World Bank acknowledges that the pillars are not mutually exclusive; failing in one may have a negative impact on other factors. The research used data published in 2010, which were the latest available when the analysis was being done. Regression analysis was used as the major analytical tool. All assumptions of regression analysis were tested to ensure that the data met them all. For all assumptions of the regression analysis, readers are asked to refer to any intermediate level statistical textbook. All missing data were deleted from the sample. The most common way of studying e-government is the quantitative one (Irani et al. 2012; Dwivedi 2009; Horan and Abhichandani 2006).

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Results Data for 133 countries were available for analysis. Table 8-1 provides a descriptive analysis of the sample.

GCI EGI

Mean 4.15 .47

Std. Deviation 0.63 0.17

N 133 133

Table 8-1 Descriptive Statistics of GCI and EGI. Source: Data Analysis (2011)

The first assumption in the regression analysis is that there should be a correlation between independent and dependent variables. Table 8-2 provides the correlation analysis. It indicates that GCI and EGI were highly correlated and the correlation was significant at 0.000. This indicates that the data used passed the first assumption of regression analysis, that independent variables (EGI) must correlate with the dependent variable (GCI). a. GCI and EG GCI Pearson Correlation Sig. (1-tailed) N

GCI EG GCI EG GCI EG

b. Coefficient Correlations Model 1 Correlations Covariances a Dependent Variable: GCI Table 8-2 Correlations of Coefficients. Source: Data Analysis (2011)

EGI 1.000 .852 . .000 133 133

.852 1.000 .000 . 133 133

EGI EG EG

1.000 .030

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It was possible that the model developed has high correlation but poor predictive ability. The researcher tested the predictive ability of the assumed model, and the results are in Table 8-3. The model predicted nearly three-quarters of GCI (see adjusted R squared). To have good explanatory power is not sufficient—one of the independent variables are left out or the model is not linear as assumed in the linear regression analysis. Durbin-Watson tests whether residuals from a statistical regression are correlated or not. The correlation of residuals means either one variable has been left out or the model is not linear (it may follow other fashions like curvilinear, quadratic and others). Durbin-Watson tests that. Durbin-Watson values range from 0 to 4. As a rule of thumb it should be closer to 2 for no error in the correlation; values closer to zero mean positive autocorrelation, while those closer to 4 indicate negative autocorrelation. The model proved that there was no autocorrelation, as the value was closer to 2.

0.8522 0.7263 0.7242 0.333 0.7263 347.56

a b

1

131 0.00

Sig. F Change

df2

df1

DurbinWatson F Change

R Square Change

Std. Error of the Estimate

Adjusted R Square

R Square

R Square Change

Sig. F Change

Change Statistics

Model R

1.9807

Predictors: (Constant), EG Dependent Variable: GCI

Table 8-3 Model Summary for Regression Analysis between EGI and GCI. Source: Data Analysis (2011)

Analysis of variance (ANOVA) tests whether the model is significant or not. Table 8-4 shows that the model is significant at 0.000.

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Model 1

Sum of Squares

Regression 38.547 Residual 14.529 Total 53.076 a Predictors: (Constant), EG b Dependent Variable: GCI

Df

Mean Square

1 38.547 131 .111 132

F 347.557

Sig. .000(a)

Table 8-4 ANOVA Tests. Source: Data Analysis (2011)

The model created is GCI = 2.626 + 3.209EGI. The t values are more than 2, indicating that the model is generally good and constant and the EGI coefficients are significantly different from 0 at 0.000. Standardized coefficient of EGI is closer to 1. The same table, Table 8-5, indicates that no apparent collinearity problem exists among the independent variables because the variance inflation factor for them is less than 3 (Neter et al. 1996). When independent variables are a linear combination of other independent variables in the model, the affected dependent variables are unstable and have a high level of standard errors. This problem is called collinearity or multicollinearity. This research used one independent variable and so there was no need to perform collinearity diagnostics. However, for completeness, the results of collinearity are presented in Table 8-6.

3.209

EGI

Source: Data Analysis (2011)

.172

.087

Std. Error

Table 8-5 Coefficients.

2.626

(Constant)

B

Unstandardized Coefficients

.852

Beta

Sta. Coe.

Sig.

18.643

30.291 .000

.000

Lower Upper Bound Bound

t

2.869

2.455

Zeroorder

3.550

2.798

Partial

95% Confidence Interval for B

.852

Part

.852

Tolerance

Correlations

Relationship between E-Government Status and Global Competitiveness

.852

VIF

Std. Error

1.000 1.000

B

Collinearity Statistics

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Model 1

Dimension

Eigenvalue

Condition Index

(Constant) 1 1.943 2 .057 a Dependent Variable: GCI

Variance Proportions

EGI (Constant) 1.000 .03 5.833 .97

EGI .03 .97

Table 8-6 Collinearity Diagnostics. Source: Data Analysis (2011)

The residuals make data obtained from regression analysis questionable. The researcher wanted to ascertain the residual characteristics of this regression analysis, which are provided in Table 8-7. The standard predicted values and standard residuals have a mean of 0 and standard deviation of close to 1, which indicates that the model is good. Minimum

Maximum

Predicted 3.022620 5.357252 Value Residual -.6943294 .8922533 Std. Predicted -2.087 2.233 Value Std. -2.085 2.679 Residual a Dependent Variable: GCI

Mean

Std. Deviation

N

4.150376

.5403907

133

.0000000

.3317648

133

.000

1.000

133

.000

.996

133

Table 8-7 Residuals Statistics (a). Source: Data Analysis (2011)

Figure 8-1 summarizes graphically the relationship between the level of e-government and competitiveness. It is clear also from this figure that the relationship is linear and positive; that is, when e-government level increases, the competitiveness level also increases.

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Figure 8-1 Graphical representation of the relationship between the level of egovernment and competitiveness of countries Source: Data Analysis (2011)

Conclusions The research attempted to ascertain the importance of e-government to the competitiveness of countries. The researcher used data relating to e-government published by the World Economic Forum and the GCI as published by the World Bank. The researcher used data published in 2010. The regression model developed and tested has shown that e-government status is an important element, accurately predicting (up to 75 percent) the competitiveness of countries. The tested model showed a positive linear relationship between egovernment and the competitiveness of a country. It is therefore important for countries to invest in ICT to increase the level of e-government in order to improve their competitiveness.

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Recommendations Many developing countries have invested a lot in several issues so as to increase their competitiveness. This study has demonstrated empirically that more than 75 percent of the competitiveness of a country is predicted by the level of e-government. This implies that developing countries should invest in this area in order to become competitive. While other issues like tax holidays may assist in increasing competitiveness, anecdotal evidence suggests that this may not be the case. Countries may advertise that they have cheap labour but if it is not backed by a good level of e-government it might be waste of resources. Therefore, to be competitive, countries must invest in increasing their level of e-government.

References Ahmad, S. and R. G. Schroeder. 2011. “Knowledge management through technology strategy: implications for competitiveness.” Journal of Manufacturing Technology Management 22 (1): 6–24. Carneiro, A. 2000. “How does knowledge management influence innovation and competitiveness?” Journal of Knowledge Management 4 (2): 87–98. Dwivedi, Y. 2009. “Viewpoint: an analysis of e-government research published in Transforming Government: People, Process and Policy (TGPPP).” Transforming Government: People, Process and Policy 3 (1): 7–15. EU. 2011. ICT for Government and Public Services. Retrieved June 13, 2011, from EU website: http://ec.europa.eu/information_society /activities/egovernment/index_en.htm Harari, O. 1994. “The brain-based organization.” Management Review 83 (6): 57–60. Hoffmann, V. E., F. X. Molina-Morales, and Teresa M. MartínezFernández. 2011. “Evaluation of competitiveness in ceramic industrial districts in Brazil.” European Business Review 23 (1): 87–105. Holmes, D. 2001. E-gov: Ebusiness Strategies for Government. London: Nicholas Brealey. Horan, T. and T. Abhichandani. 2006. “Evaluating user satisfaction in an e-government initiative: results of structural equation modelling and focus group discussions.” Journal of Information Technology Management 17 (4): 33–44.

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Ille, F. R. and C. Chailan. 2011. “Improving global competitiveness with branding strategy: Cases of Chinese and emerging countries’ firms.” Journal of Technology Management in China 6 (1): 84–96. Irani, Z., V. Weerakkody, M. Kamal, N. M. Hindi, I. H. Osman, A. L. Anouze, R. El-Haddadeh, H. Lee, M. Osmani, and B. Al-Ayoubi. 2012. “An analysis of methodologies utilised in e-government research: A user satisfaction perspective.” Journal of Enterprise Information Management 25 (3): 298–313. Katos, A. V. 2009. “The Impact of Information and Communication Technologies on National Competitiveness: A Test of a Mediating Model in the Non-European Union and Central Asian Countries Context.” Journal of Information Technology Impact 9 (3): 145–154. Kolsaker, A. and L. Lee-Kelley. 2008. “Citizens’ attitudes towards egovernment and e-governance: a UK study.” International Journal of Public Sector Management 21 (7): 723–738. Lall, S. 1990. Competing with Labour: Skills and Competitiveness in Developing Countries. Geneva: ILO. Lee, J. and E. E. Karpava. 2011. “The US and Japanese apparel demand conditions: implications for industry competitiveness.” Journal of Fashion Marketing and Management 15 (1): 1361–2026. Lenihan, D. 2002. Realigning governance: from e-government to edemocracy. Retrieved from OECD Centre for Collaborative Government: www.collaborativegovernment.com. Lin, C., H. Hsieh, N. Yuok, C. Savary, and V. Sum. 2004. “Evaluating the Competitiveness of Least-Developed Countries: The Example of Cambodia.” Asia Pacific Management Review 9 (2): 205–227. Mamoya, K. 2011. “Cooperation for competitiveness of emerging countries: learning from a case of nanotechnology.” Competitiveness Review 21 (2): 152–170. Mnjama, N. and J. Wamukoya. 2007. “E-government and Record Management: an Assessment Tool for E-records Management in Government.” The Electronic Library 25 (3): 274–284. Moon, M. J. and D. F. Norris. 2005. “Does managerial orientation matter? The adoption of reinventing government and e-government at the municipal level.” Information Systems Journal 15 (1): 43–60. Mutula, S. M. 2008. “Comparison of Sub-Saharan Africa.” Information Management and Computer Security 16 (3): 235–250. —. 2010. “Deploying Development Informatics in Bridging the Digital Divide, Challenges and Opportunities.” 11th DIS Annual Conference. Richardsbay: University of Zululand.

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Ndou, V. D. 2004. “E-Government for Developing Countries: Opportunities and Challenges.” The Electronic Journal on Information Systems in Developing Countries (EJISDC) 18 (1): 1–24. Neter, J., M. Kutner, C. Nachtsheim, and W. Wasserman. 1996. Applied Linear Statistics Models, Fourth Edition. Chicago: Irwan. Pai, J.-C. and C.-H. Yeh. 2008. “Factors Affecting the Implementation of E-business Strategies.” Management Decision 46 (5): 681–690. Porter, M. 1990. Competitive Advantage of Nations. New York: Free Press. Porter, M. E. and V. E. Miller. 1985. “How Information Gives you competitive Advantage.” Harvard Business Review Jul–Aug: 1–13. SADC e-Readiness Task Force. 2002. SADC e-Readiness Review and Strategy: Recommendations of the SADC e-Readiness Task Force. SADC. Shafaei, R., H. Shahriari, and M. Moradi. 2009. “Investigation of leather industry competitiveness in Iran.” Journal of Fashion Marketing and Management 13 (3): 343–357. Thai, V. V. and D. Grewal. 2005. “An Analysis of the Efficiency and Competitiveness of Vietnamese Port System.” Asia Pacific Journal of Marketing and Logistics 17 (1): 3–31. Waheeduzzaman, A. N. 2011. “Competitiveness and convergence in G7 and emerging markets.” Competitiveness Review 21 (2): 110–128. West, A. 1992. Innovation Strategy. New Jersey: Prentice Hall. Yeo, G.-T., M. Roe, and J. Dinwoodie. 2011. “Measuring the competitiveness of container ports: logisticians’ perspectives.” European Journal of Marketing 45 (3): 455–470.

CHAPTER NINE OPPORTUNITIES AND CHALLENGES OF AGOA FOR TANZANIAN FIRMS: MARVELLOUS FLOTEA, A SUCCESSFUL STORY WINEASTER ANDERSON AND JOHN R. M. PHILEMON

Introduction Since independence in 1961 Tanzania has faced economic and development challenges that have had an impact on its ability to participate meaningfully in the multilateral trading system. These challenges include inadequate investment in physical and financial infrastructure, lack of skilled personnel, a weak institutional framework, lack of market information and low technology transfer (Anderson, 2011). The country is heavily dependent on agriculture, which accounts for more than half of the country’s GDP and 85 percent of its exports, and employs 80 percent of the workforce.1 Tanzania has experienced a persistent balance of trade deficit since the late 1970s, with a continuing unfavourable gap between exports and imports as a result of sluggish export growth and a rapid rise in imports. To circumnavigate these challenges, Tanzania has embarked on promulgating legislation and policies geared towards creating a more conducive business environment and mainstreaming trade in export-led growth strategies. For instance, the formulation of the Tanzania Trade Policy (2003) and Export Processing Zones Authority (2002) are envisioned to transform the country into a competitive and export-led entity that will enhance domestic integration and greater participation in the global economy. 1

See World Factbook entry on Tanzania at www.cia.gov/library/publications/theworld-factbook/geos/tz.html.

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Fortuitously, on 18 May 2000, the United States enacted The African Growth and Opportunity Act (AGOA) to offer tangible incentives for SubSaharan African (SSA) countries to upgrade their efforts to open up their economies and provide a free market. The objective of AGOA was and still is to encourage trade and investment between the United States and SSA countries through a reduction in tariff and non-tariff barriers (Brenton and Zuki 2004). It offers the potential of tariff-free access to the US market for imports from thirty-seven eligible SSA countries. Through this act it was expected that African countries, Tanzania included, could stimulate their economies, promote high levels of dialogue on trade and investment issues, encourage economic integration, and facilitate SSA integration in the global economy. In accordance with Section 4 of AGOA, a country is AGOA eligible when it fulfils the following conditions: x Establishment of a market-based economy and the rule of law. x Elimination of barriers to US trade and investment. x Adoption of policies that promote poverty reduction and other social and economic goods. x Protection of intellectual property. x Suppression of corruption. x Protection of human rights and workers’ rights including the elimination of certain child labour practices. x Refrain from engaging in activities detrimental to US security and foreign policy interests. x Refrain from violating human rights and from supporting international terrorism.

AGOA Timelines AGOA was initially planned to last for eight years before the AGOA III amendment, which extended its lifespan to 2015 with the intention of providing enough time for firms in Africa to develop their capacity and upgrade their competitiveness so that they could export to the US. The AGOA forum which took place in 2011 in Lusaka, Zambia, under the theme “Enhanced Trade through Increased Competitiveness, Value Addition and Deeper Regional Integration,” marked the tenth year of AGOA. Delegates to the forum called for the extension of AGOA and export diversification to the US market beyond 2015, in recognition of its still unexploited and unfulfilled objectives. Most AGOA-eligible African countries have not been able to take full advantage of the process; it is

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widely recognized that some have utilized a mere 0.025 percent of the product lines offered. It is thus argued that extending the time would greatly benefit the thirty-seven AGOA-eligible countries and further enhance trade relations with the United States. It has, without doubt, been noted that AGOA has offered tangible incentives for African countries to continue their efforts to open up their economies and create a free market. Two countries which have greatly benefited from the process have been Nigeria and Angola, as their exports are in oil and mineral deposits. Lesotho, Swaziland, Kenya and Madagascar have equally benefited from AGOA, which remains of critical importance.

Opportunities and challenges of AGOA To date, more than 6,000 eligible products enter the US market from African countries through AGOA. Likewise, AGOA has enabled many actors to access the market through its ongoing capacity building and technical assistance, as well as its provision of education and research services for actors in developing countries, particularly SMEs. AGOA enables trade and investment as well as food assistance to be channelled through the US Agency for International Development. By 2009, many AGOA-eligible countries had recorded less than US$ 1 million worth of US-bound exports. The value of bilateral trade flows between Tanzania and the United States has remained fairly constant in recent years. In 2002, Tanzania recorded a trade deficit of US$37 million with the US (the 2001 figure was US$36 million). Tanzania’s exports to the US are dominated by two product categories, “agricultural products” and “minerals and metals,” which together accounted for over 84 percent of the country’s exports to the US in 2002. About US$35 million was earned from Tanzania’s agricultural exports to the US in 2010, followed by minerals at US$15 million and textiles at US$2 million, totalling about US$50 million. Products such as cashew nuts, specialty coffee and flower seeds from the fertile Kilimanjaro area are sold to the US market, but much of Tanzania’s agricultural produce is shipped to Europe due to historical trade connections. Only a small portion of Tanzania–US trade is exported under the provisions of AGOA. In terms of AGOA, Tanzania is classified as a “less developed country,” and qualified for the “wearing apparel” provisions, which allowed it the use of non-qualifying third country textile inputs for the manufacture of AGOA-eligible garments until 2004. Given the status of African firms at the time AGOA was enacted, and despite the good intentions, the extension did not encourage heavy long-term investment.

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Investors did not invest heavily, fearing the risk of not recouping their capital outlay prior to the expiry of the legislation. The temporary timeframe of AGOA was, it seems, intended to benefit countries already producing eligible commodities. However, as Mutenyo and Moyo (2010)have noted, “at the inception of AGOA, Africa’s production capacity was quite low, however, and substantial time was necessary to establish the productive capacity and infrastructure to take advantage of the benefits of the preference scheme(pp 9).” AGOA has kept the focus on tariff reductions and waivers, but other major US policies and programmes have been a hindrance, which when removed could enhance Africa’s trade capacity. The US sanitary and phytosanitary standards that have to be met by African exporters have been one of the biggest challenges facing exporters who are endeavouring to take full advantage of US preference programmes like AGOA. Statistically speaking, despite the diverse business opportunities provided by AGOA, Tanzania does not appear to have taken advantage of them. Ironically, while Tanzania has met AGOA’s “wearing apparel” provisions, 2002 trade data show very few exports to the US of textiles and apparel. Despite the opportunities provided by AGOA, Africa and Tanzania in particular still export less to the US than to Europe, Asia and the Middle East, and exports to the US account for less than intra-African trade. It is however worth noting that trade between Tanzania and the US has been slowly increasing over the years since 2000. Whereas it was intended that AGOA would open up the US market to eligible countries, in fact the US is exporting more and more to Tanzania.2 A number of factors may explain Tanzania’s seemingly dismal export performance to the US. At the national level, Tanzania is facing mounting challenges that, if left unaddressed, may leave the benefits envisaged under AGOA as just a pipedream. These challenges include inadequate investment in physical and financial infrastructure, lack of trained, skilled personnel in government and the private sector, weak institutional management, lack of market information and low technology transfer. Moreover, despite the opportunity provided by AGOA, external competition and, most crucially, the ending of the Multi-Fibre Arrangement (MFA) in January 2005 have opened up the apparel sector to competitive market forces. Previously, the MFA, which had been in place since 1974, was meant to impose quotas on the amount developing countries could export to developed countries. AGOA producers now face 2 For detailed bilateral trade data for Tanzania disaggregated by industry sector, see http://www.agoa.info/popup/trade.php?country=tz.

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the risk that the US government may extend similar benefits to China, India and other east Asian countries that are already far more competitive than African countries. Over the years the US has increased its trade capacity building (TCB) activities in SSA countries. This effort has undoubtedly enhanced developing countries’ capacity to engage in trade negotiations, improve business regulations, deepen the financial sector, and attract foreign direct investment to become more competitive. However, these TCB activities cover many aspects of the economy, but they do not specifically address the problems facing firms that are attempting to break into AGOA trade. Despite the perceived peace in the country relative to most of its neighbours, entrepreneurs in Tanzania lag behind East African countries in terms of international trade negotiation skills, managerial capacity and business basics. In only one case, that of Marvellous Flotea, has a business availed of the opportunities presented by AGOA. Marvellous Flotea may be used to show the business community not only how some entrepreneurs in the country have taken advantage of these opportunities, but also the predicament that firms and entrepreneurs will face with the phasing out of AGOA in 2015.

Figure 9-1 General Tanzania Exports 1978–2010 (US$ millions). (Export data from 1992 to 1995 are not available.) Source: Bank of Tanzania (several years), Economic and Operations Reports.

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The future of AGOA beyond 2015 lies with the US government’s New Partnership for Trade Development Act of 2009, which is geared towards harmonizing US trade policy and development efforts. The legislation has three key objectives. First, it seeks to extend the trade benefits currently available to AGOA-beneficiary countries by, inter alia, extending the Act's scope and coverage. Second, it seeks to harmonize and broaden US preferential trade policy amongst least-developed countries by extending certain benefits to other beneficiaries of the US Generalized System of Preferences (GSP). Third, it seeks to simplify the US GSP through implementing a single Rules of Origin, reviewing current statutory exclusions and extending the programme’s timeframe.

Marvellous Flotea: a Successful Story of AGOA in Tanzania Marvellous Flotea Company (MFCL) is an enterprise dealing with handicrafts and household items made from textiles, with a total of sixty employees (67 percent of them permanent). MFCL started business as Marvellous Batik on 25 July 1992 as a sole proprietorship, and became a registered business in 2003 when the proprietor entered into partnership with her four daughters in order to run the business. The business was formed through the initiative of Flotea Massawe, who was well prepared and determined to overcome her own family’s social and economic problems. Like many other housewives in developing economies, she found herself in a dilemma, wanting to stay close to her children while at the same time establishing a business to take advantage of the economic opportunities available in the market in order to make ends meet. She saw the opportunity of selling artistically designed clothing to foreigners, many of whom are attracted to Tanzanian cultural products. Highly motivated to start a business, Ms. Massawe had the skills for making handicraft products, having developed a keen interest in arts and crafts when she was a teenager. As a woman of strong faith and convictions, she said that she was inspired by the following biblical quotation: Make it your ambition to lead a quiet life, to mind your own business and to work with your hands ... so that your daily life may win the respect of outsiders and so that you will not be dependent on anybody. (1 Thessalonians 4:11–12)

Ms. Massawe’s designs celebrate the beauty and richness of Tanzanian culture. She reasoned that she could use her talents to produce locally

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made designs using 100 percent cotton. In 1991, she felt called to use her handicraft skills to mentor women by starting the household name of Marvellous Batik. In twenty years the group has trained over 200 people, especially women or women’s groups. The training has enabled the beneficiaries to become self-employed, has created employment for others and generated income. To nourish her initiative in 1992 she established Marvellous Batik, an SME, her vision being “To become the global model network of textile handicraft connecting to the global market with innovative textile products and give hope to the disadvantage producers in our community.” Making her vision a reality was not easy without acquiring proper business knowledge and relevant entrepreneurship skills. Thus, between 1995 and 2005, Ms. Massawe attended various training courses and workshops on business training, skills development, entrepreneurship, exposure to export markets, leadership, and communication skills. With the aim of making a difference, not only to herself but to fellow women in Tanzania, Ms. Massawe carried out a small piece of research and found that many more women than men were unemployed in Tanzania. She also noticed that there were many women and youths with traditional skills that could be used, and raw materials were not that scarce. She also felt that there was a real chance of success as both public and private institutions were supporting the internationalization policies and strategies. Because of that, she decided to formalize her business, and in 2005 Marvellous Flotea Co. Ltd (MFCL) was registered. MFCL currently holds a prominent position in the market, with over twenty years’ experience and a proven track record of achieving excellence and costeffectiveness at every point in the supply chain.

Marvellous Products and Target Markets MFCL manufactures a variety of household items and handcrafts made from textiles. Since it was started, it has trained other small-scale players in the market in order to build their capacity, while at the same time boosting the market of the company and assisting small operators who are mostly women. The main products include household items such as napkins, table runners, place mats, aprons, hot pads, and hand and tea towels; bedding in the form of pillows and pillow cases, throws, curtains, quilts and bedspreads; and personal accessories including conference wallets, handbags, shopping bags and file organizers.

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Figure 9-2 Examples of MFCL merchandise.

Due to the increased demand for the products, with their unique design, the company is finding itself unable to meet both local and international demand without expanding its operations to over a thousand units per month, which it cannot afford to do at present. The enterprise has both local and international customers, with sales of around US$476,245 in the past three years, from a total of 45,200 units. Local customers include individuals and institutional customers. The local market segment comprises middle and upper-income earners (including diplomats and expatriates), while the institutional segment comprises hotels and fashion boutiques that sell the products to tourists

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and the like. Countries buying MFCL products include the USA, UK, Italy, Germany, Spain, Australia, South Africa, Kenya, Uganda, Zambia and Mozambique. The domestic market constitutes 60 percent of MFCL’s turnover per year, with a growth rate of some 20 percent per annum. However, some of the domestic sales comprise internal exports through selling to foreign tourists and businessmen visiting the enterprise. Currently, 30 percent of the traditional segment buys MFCL’s household items and 40 percent of the consumer market buys an assortment of household items and personal accessories. MFCL has export orders for household items, accounting for 40 percent per annum. The international market opens up the products to the global community, thereby increasing the demand for handicraft products. The stability of the euro and the dollar up to 2008 resulted in increased profits for MFCL.

Gross revenue

2006

2007

2008

81,378

104,000

182,882

Table 9-1 MFCL Exports under AGOA during 2006–2008 (in US$). Because of its strong growth and demand for its products in Europe and America, MFCL has identified major distributors who are market leaders in their respective trade, with a strong presence in the retail sector, and a pan-European network for further geographical expansion to other EU markets for its handicraft products. The Tanzanian handicraft industry has positioned MFCL’s products at the medium to high end of the market, which communicates a high value quality image. The MFCL assortments include attractive margins for the distribution chain, guaranteeing sales commitment. MFCL is in the process of expansion and in the last two years the market has been expanding by over 20 percent per annum. It is expected that the market will expand by 50 percent in the years to come. It is estimated that 40 percent of the Tanzanian handicrafts penetrating the USA through AGOA are supplied by MFCL, and reach the market through a network of wholesalers and retailers. MFCL’s future focus and strategy for growth include adding value, developing new products, increasing the volume of existing products and the ongoing strengthening of leadership and management. MFCL’s business model continues to provide highly attractive returns to investors and business partners, because its philosophy is focused on achievement and it prudently expands its operations for the benefit of all stakeholders. Over many years the company has participated in numerous exhibitions

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and trade fairs, emerging as the winner in various categories and positions. Since its foundation, MFCL has received various international awards, including the African Women Entrepreneurs Programme (AWEP) Senior Advisor—AGOA (2011). AWEP is an outreach, education, and engagement initiative that targets African women entrepreneurs to promote business growth and increased trade with both regional and US markets through AGOA, to create better a business environment and empower African women entrepreneurs to become agents of change in their communities. Through the programme, networks of women entrepreneurs are identified and built across Sub-Saharan Africa in order to transform societies by helping women to own and operate small and medium-sized businesses. MFCL took first place amongst arts and crafts cottage industries exhibitors at the thirty-fourth Dar es Salaam International Trade Fair in 2010, first place at the Leather and Textile Exhibition, Arts and Culture, Food and Processing in 2010, and won the 2009 World Fair Trade Organization (WFTO) Mohammed Islam Artisan Recognition Award for the best traditional design adapted to modern life. The award, presented during a conference organised by the WFTO, is given to encourage, recognize and reward creativity in product development. The company has won numerous other awards for handicrafts, entrepreneurship, and supporting women’s rights over the years, both nationally in Tanzania and internationally.

Conclusion Tanzania has long faced economic development challenges that impact on its ability to participate more meaningfully in the multilateral trading system. Despite the diverse business potential represented by AGOA, it does not appear to have taken advantage of these growth opportunities. Hence, more is required in order to fully exploit the opportunities granted by AGOA before it expires in 2015, which may not necessarily strike again. First, improvement is needed in terms of enhancing African capacity to meet US sanitary and phytosanitary standards. Tanzania would greatly benefit from a capacity-building initiative if the US government was to establish a fourth regional trade hub in the country for this purpose. The other three are in Accra, Gaborone and Nairobi. Second, as noted by Páez et al. (2010), when AGOA ends in 2015, new initiatives need to address the current concentration of benefits to a limited number of countries and products; they must reorient FDI to more sectors, in contrast to the current

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bias that primarily targets the textile, apparel and oil sectors; and AGOA should be made more inclusive, accessible and permanent. Third, concerted efforts need to be made by the eligible countries to eliminate supply-side constraints. According to Kraftt and Page (2010) Africa’s major supply-side constraint is actually in terms of trade logistics, as African countries are considered to have the highest trading costs in the world. On the part of Tanzania, there is a need for the government to promote more FDI in the apparel industry so that it can stand up to the country’s main competitors. Likewise, the government should collaborate with active institutions to choose a few best-prospect sectors and design a clear strategy to promote them under AGOA. In addition, the country is yet to convince international airlines to offer direct flights from the US, a development that would greatly increase exports. Thus, efforts by various stakeholders are needed to lobby for direct flights to the US from Kilimanjaro, which would support both the tourist industry and Tanzanian horticultural exports to the US. Needless to say, the government should determine how the Small Industries Development Organization (SIDO) could better organize and support local producers. Networks among traders boost their initiatives to trade abroad. Thus, Tanzania could look for ways of connecting local producers with their counterparts in other EAC member states to consolidate volumes and fulfil the large number of orders of US customers. Last but not least, to enhance national competitiveness through pillars that promote higher productivity, developing economies like Tanzania should develop entrepreneurial capacity, address technical capacity and infrastructure constraints, align export and investment promotion institutions and engage financial institutions in export promotion planning. More practical research is recommended to address what measures are appropriate and how to implement the proposed pillars.

References Anderson, W. 2011. “Internationalization Opportunities and Challenges for SMES from Developing Countries.” Journal of African Business, 12 (2): 198–21. Brenton P. and T. Zuki. 2004. The Initial and Potential Impact of Preferential Access to the U.S. Market under the African Growth and Opportunity Act. Washington, D. C.: World Bank. Krafft, Nick and John Page. 2010. “Trade Logistics: AGOA’s next frontier.” In Agoa at 10: Challenges and Prospects for U.S.–Africa

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Trade and Investment Relations, 22–25. Washington, D. C.: Brookings Institution. Páez, L., S. Karingi, M. Kimenyi, and M. Paulos. 2010. “A Decade (2000– 2010) of African–U.S. Trade under the African Growth and Opportunities Act (AGOA): Challenges, Opportunities and a Framework for Post-AGOA Engagement.” Paper presented at the 2010 African Economic Conference, Tunis, Tunisia, October 27–29. Mutenyo, J. and N. Moyo. 2010. “Addressing Uncertainty To Spur Investment In Africa.” In AGOA at 10: Challenges and Prospects for U.S.–Africa Trade and Investment Relations, 8–11. Washington, D. C.: Brookings Institution.

CONTRIBUTORS

Dr. Goodluck Charles: Lecturer at the university of Dar es Salaam with vast teaching, research and consultancy experience in international entrepreneurship, family business and business regulations Dr. Huruma Sigalla: Senior lecturer at the Departent of Sociology and Anthopology at the University of Dar es Salaam. He teaches community development, population and reproductive health. Dr. John R. M. Philemon: Lecturer at the University of Dar es Salaam with ten years’ experience in research, consultancy and teaching in the areas of marketing, international business management, and services marketing. He is currently the coordinator of Masters of International Business and Masters of International Trade degree programmes at the University of Dar es Salaam Business School. Dr. Ulingeta Mbamba: Senior Lecturer in the Department of General Management and the Dean of the University of Dar es Salaam Business School, where he teaches Management Information Systems related courses. Dr. Wineaster Anderson: Senior Lecturer, University of Dar es Salaam, where she has been since 2001, teaching, researching and consulting on International Marketing, Tourism Economics and Tourism Management. Mr. David Rwehikiza: Assistant lecturer at the University of Dar es Salaam with vast experience in international logistics, business formalization and regulations. He is pursuing doctorate studies at the University of Dar es Salaam. Mr. Deusdedit Rwehumbiza: Assistant lecturer at the University of Dar es Salaam and currently pursuing doctorate studies in International Small Enterprises Promotion and Training (SEPT) Program at Universität Leipzig in Germany. Ms. Amina Akida: Researcher, Forest and Beekeeping Division Officer in the Ministry of Natural Resources and Tourism (MNRT) and a member of Tanzania Natural Resources Forum (TNRF).

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Ms. Fan Liu: A Ph.D. candidate at the College of Business Administration, Kyung Hee University, Seoul, Korea. She is specialized in Chinese business development. Prof. Humphrey P.B. Moshi: Associate Research Professor at the University of Dar es Salaam. Prof. Kyung-il Ghymn. Dean of the College of Business Administration at the United African University of Tanzania (UAUT). Ghymn is a Professor of Marketing and international Business. He received his PhD from the University of Pittsburg. He has taught in Taiwan, China and Korea, and his research interests are concerned with international business.