A The Situation at Independence

The early independence period from 1961 inherited effects of the colonial period, whereby local development initiatives had been interrupted, and accumulation processes had been countered by colonial government policymaking processes. This period inherited the colonial creation of social differentiation and compartmentalisation of society along racial lines (Rweyemamu, 1973). Europeans in business and the civil service were at the top, followed by Asians in trade, industry, and commercial agriculture, and at the bottom of the ladder were Africans. These classes were reinforced by economic and social discrimination. This situation was consolidated through discrimination in the issuance of business licences along racial lines, which had become institutionalised. The task of the newly independent government was to try to redress this discrimination in the issuance of business and trade licences.

B Origins of the Position of Asians

The origins of Asian business can be traced to the beginning of the twentieth century. Immigration of Asians, also referred to as British Asian subjects, began when some came to East Africa to construct the East African Railways, and others to start a network of commerce in the region (Mkapa, Reference McMillan, Rodrik and Verduzco-Gallo2005). Those who were in trade had connections with the commercially active on the Swahili coast. Those who were engaged in internal trade were largely active in buying crops (maize, paddy, cassava, millet, sunflower seeds, groundnuts, beeswax, and honey) from peasants and selling manufactured goods (textiles and garments, soap, and cooking oil) in return. Over time, some of them turned commercial capital into industrial capital, mainly through agricultural processing such as rice and flour milling, oil processing, and soap. In the struggle for independence, Mwalimu Nyerere’s visionary leadership took on board supportive Asians and Europeans.

C Development Initiatives in the Early Post-Independence Period

On gaining independence in 1961, Tanzania was a poor agricultural economy, with small mining and commercial sectors, and an expanding state bureaucracy assisted by foreign aid and loans. The guiding policy framework in the early post-independence period emanated from the World Bank and Arthur D. Little reports of 1961, which emphasised private sector development without questioning or specifying the ownership and product mix. The policy and strategy arising from these reports was expressed in the Three Year Development Plan (1961–3) and the First Five Year Development Plan (1964–9). The two plans essentially left the economy in the hands of the private sector, which was largely foreign (non-indigenous), relying on foreign aid and foreign direct investment (FDI). These development plans were geared to gradual growth by building on the basic structures of the colonial economy, encouraging agricultural modernisation, and stimulating private investment in industry and commerce.

The ownership structure of industry during the first years of independence remained primarily the outcome of colonial restrictions that had reserved certain industrial activities for British firms, and barriers to indigenous investors were removed (Silver, Reference Rweyemamu, Kim, Mabele and Schultheis1984). Industrial policy was geared to basic import-substitution industrialisation, with support to protected industry via tariffs (thereby creating rents, which were either of learning or monopoly character). There was little incentive to encourage learning and the infant industries did not grow to maturity as expected. This resulted in learning rents turning into monopoly rents. Members of parliament lacked personal power bases (Bienen, Reference Belghith, Lopera, Ndip and Karamba1970), a phenomenon that was reinforced by tight vetting of candidates and election regulations prohibiting use of private funds in campaigns (Barker and Saul, Reference Bahl and Martinez-Vazquez1974). In the industrial sphere, a mini-industrial investment boom that began in around 1955 continued until the mid-1960s. The main investors were East African Asians (the Chandes, Madhvanis, and Chandarias), settlers, traders, and multinationals. These groups were attracted to Tanzania because they were uncertain about political stability in Kenya and Uganda, about the future of the East African common market, and because the government gave them the right signals. These investments were probably as much as Tanzania could expect, and the period should be viewed as reasonably successful in terms of creating value-enhancing economic rents (Cooksey and Kelsall, Reference Clark2011).

The investment programme that was proposed in the early 1960s built on the inherited structure from the colonial period and was expected to be implemented through the encouragement of local and foreign private investment. The accent here was on using foreign capital to solve what was seen as the problem of scarcity of capital. In spite of all the incentives provided for in the Foreign Investment Protection Act of 1963, the response from the private sector fell below expectations. In addition, the absence of any significant local entrepreneurial class posed a problem of how to gain local control of the development process.

During this period, the country was very rural, with about 95 per cent of the population residing in rural areas, where poverty was rampant largely owing to low productivity in agriculture. Efforts towards agricultural transformation in the absence of a significant business class in agriculture started with various initiatives and programmes to support agriculture productivity growth and rural transformation. In the first five years of independence, the government adopted a transformation approach on the recommendation of the World Bank (World Bank, Reference Victor and Heller1961). This involved moving some of the farmers from their traditional villages to new villages or settlement schemes to fast-track the introduction of agricultural transformation, on the assumption that smallholder farmers were poor because of lack of capital and technology. The rationale for the transformation approach was to transform agriculture by introducing the technical, social, and legal systems that allow the use of modern agricultural techniques meant to achieve high productivity, based on investment of capital (Bank of Tanzania, 1982, p. 76). The assumption was that a business class could be created in agriculture driven by technology. The improvement approach based on demonstration effects from progressive farmers also did not yield the expected outcomes, owing to a lack of participation from the peasants themselves. This approach to agricultural transformation failed because of the cost of replicating it in the country (Cliffe and Cunningham, Reference Chande1973).

D Continued Concern over Social and Economic Differentiation

Clearly, in the early 1960s, little was done to cultivate a healthy relationship between politics and business, since business was dominated by foreigners and alien Tanzanians. This kind of domination had political sensitivities after independence. In the absence of any significant local (African) entrepreneurial class, reliance on the free market and private sector-led development was risking the continuation and even consolidation of distorted economic and social structures. This situation posed the political problem of how to gain local control of the development process. These initial conditions in the early post-independence period exhibited social and economic differentiation in the business sector and political concerns over the control of business by non-Africans. This situation continued to influence relations between politics and business into the subsequent periods.

These considerations influenced the timing and content of the Arusha Declaration. This was a decisive factor in disrupting the equilibrium that had essentially persisted in the early post-independence period.

A The Arusha Declaration Response

The Arusha Declaration in 1967 was a response to the challenges of the early post-independence period. It made an ideological shift and enunciated the principles of socialism and self-reliance to address concerns about the initial conditions at independence. In the theoretical framework of this chapter, the Arusha Declaration represents a disruption of the equilibrium that was prevailing in the early independence period. Enshrined in the Arusha Declaration was the concept of people-centred development, which became a running theme through the post-independence Nyerere period. This concept was interpreted broadly to include social and economic liberation with human dignity, equality and freedom of the individual, equality of opportunity across all races, and commitment to reduce income and wealth differentials in society. Implementation of the Arusha Declaration started with nationalisation of the major means of production at that time, such as large industries, commercial farms, banks, and large wholesale and retail trade establishments. One consequence was the change in the ownership pattern whereby the major means of production were nationalised, and most major subsequent investments were made in public enterprises. This situation led to the emergence of a public business through parastatal sector development. The nationalisations soon devolved into a three-tiered structure of parastatal investment banks, holding companies for productive enterprises, and the enterprises themselves. The Arusha Declaration precipitated and shaped the different type of relationship between politics and business that followed.

B Emerging Public Sector Business Leaders

In order to curb the growing relationships between politics and business, the Arusha Declaration introduced a Leadership Code that prohibited politicians and public servants from engaging in private business as shareholders or directors. It was hoped that this move would curb the practices of capitalist accumulation that had started to emerge in the business and politics relationships. The appointees to leadership positions in the parastatal business sector fell into three groups of managerial staff. The first group was appointed from the category of politicians: mainly nationalist organisers in the struggle for independence, such as George Kahama and Paul Bomani, who had organised farmers in the independence struggle through cooperatives in the Lake Region in Kagera and Mwanza, respectively. The second group were young, educated Africans. Most of these young managers were sent to study abroad, mainly at the Arthur D. Little School for training professional managers and Williams College, both in the United States. Although qualified, they had little experience. Therefore, they were subjected to learning by doing and gaining experience running large-scale operations on the job. The third group was expatriates who were engaged to fill positions for which Tanzanians were not available.

The appointments of top managerial staff favoured consideration of ‘political commitment, ideological orientation and patriotic pretensions’, rather than training or professional competence (Cooksey and Kelsall, Reference Clark2011, p. 17). This is one indication that the choices that were made about management and mode of operation were more driven by politics than value-maximisation. The interaction between politics and business changed with the adherence to state control of the major means of production.

C Initiatives to Promote Indigenous Business Sector

Initiatives were taken to try to move the business sector from being predominantly foreign and non-indigenous Tanzanian owned towards increasingly indigenous private business owned. In this context, the most important initiative was to promote small businesses to support empowerment of the majority of the indigenous entrepreneurs. In order to ensure that small businesses were supported to engage in industry and to spread out to the whole country, in 1966 the government established the National Small Industries Corporation (NSIC) under the National Development Corporation (NDC). In 1973, the NSIC was hived off from NDC and transformed into the Small Industries Development Organisation (SIDO), with a vision of being a leading business support organisation in Tanzania, providing quality services efficiently and effectively in a business-like manner that would unlock potential for the growth and competitiveness of small and medium-sized enterprises (SMEs) in rural as well as urban areas.

The central purpose and role of SIDO was to create and sustain an indigenous entrepreneurial base through promotion and support of SMEs by providing them with business development services and specific financial services on demand. The strategy that was adopted was to facilitate capacity building and capacity development of small enterprises through technology development, transfer and provision of technical services, training, consultancy and extension services, marketing and information technology programmes, and financial advisory and credit services. For over a decade following its establishment, SIDO played an important role in facilitating growth of the small-industry subsector and operated within the framework of a centrally planned and state-controlled economy. The impact on indigenous private sector development was at best quite modest is not insignificant. However, among the private businesses that were either not nationalised or were established after the nationalisation phase of 1967–8 was over, the foreign and non-indigenous Tanzanian private sector continued to dominate the industrialisation scene.

D Initiatives to Promote Parastatal Sector Business

The parastatal business sector was the real hope for changing the dominance of non-indigenous private sector business by facilitating the expansion of the parastatal sector. It is for this reason that parastatal sector expansion was accelerated through a series of favours in resource allocation. Favours took the form of import licences, foreign exchange allocations, credit allocation, and human resource allocations. The emerging new equilibrium in the relationship between politics and business in the new environment was manifested through new institutions such as parastatals, villagisation, import licensing, foreign exchange controls, credit control, and price controls. Protection through tariffs and other means was negotiated between investors and the government rather than through a cohesive industrial strategy (Rweyemamu, 1979), a situation that ensured that rents were accessed. These institutions provided rents to the parastatal business sector. The types of rents available to industrial parastatals included direct state subsidies, access to finance directly from state-owned commercial banks, foreign concessional financing by donors for specific projects, and rents originating from tariffs and exchange rate policy (Bigsten and Danielson, Reference Bertho2001). Price controls based on the cost-plus principle guaranteed rents for the parastatal business enterprises.

The politics of the extension of state control was increasingly vested in an expanding group of ruling party, bureaucratic, and management officials (Shivji, 1976). However, some of the private businesses developed relations (formal and informal) with the state. It is important to understand these relations, how they changed over time into the liberalisation era, and their implications for privatisation, institutional reform, and corruption. The foreign private sector players were incorporated into nationalised companies as managers, through management agreements, as suppliers of equipment, and as minority shareholders.

E Public–Private Business Relations

In pursuit of national unity, during this phase the space for key stakeholders to articulate their interests was curtailed. Private sector business was not organised and did not have a forum for dialogue except the various chambers of commerce. However, private investment continued to grow as parastatal investments were increasing.

The question is to what extent the political elite promoted the domestic business sector. The NDC was mandated by the government to set up large-scale industrial enterprises with the state holding majority shares. In practice, the minority shareholder acted as supplier of equipment and provider of management and technical advice. Choice of technology for the projects was left to the foreign partner as the Tanzanian state had little access to global information on the sources and comparative costs of technology (Barker et al., Reference Bacon1986). Most of the directly productive parastatals were turnkey projects engaging foreign partners and expatriate management. Rather than engaging in joint ventures with the domestic business sector, the parastatals often engaged foreign-owned companies in joint ventures in consideration of supply of technology, equipment, and management. The desire to show results quickly induced NDC to set up enterprises in the shortest possible time. It is for this reason that NDC was quite happy with turnkey projects offered by the foreign partner (Barker et al., Reference Bacon1986). The large number of joint ventures with foreign capital weakened state control in industry, and over-reliance on expatriates and foreign technical assistance left little space for building up technological expertise among nationals and in the process the domestic private sector was not promoted.

The preference for foreign partnership on the grounds of technology transfer and technical assistance meant that the potential of partnership with the domestic (Tanzanian or East African) private sector was not fully harnessed. In this regard, Barker et al. (Reference Bacon1986) have examined the production processes of enterprises established by East African Asian capital and concluded that they stood a better chance of achieving sustainable accumulation because they obtained their profits through simpler management organisation, using equipment closely tailored to their needs, with relatively low capital costs and low maintenance requirements, which was more amenable to local manufacture and maintenance. The implication is that the assumption by government that local entrepreneurship was not available to provide technical assistance to parastatals and therefore led to reliance on foreign technical advice and management agreements may not have been correct in all cases. The reasons may have been political, considering that the dominance of non-indigenous private business and racial inequalities had been a major concern in the post-independence period.

The relatively large local private business sector did not enter into joint ventures with parastatals except in a few cases, such as the LONRO-controlled MTAVA (a vehicle assembly plant set up in 1965), where the shares were 50 per cent LONRO, 23 per cent Cooperative Union of Tanzania, 23 per cent Mwananchi Development Corporation (the economic wing of TANU, the ruling political party), and 4 per cent Barclays. In 1975, the structure had basically remained the same, except NDC had taken over the shares of Mwananchi Development Corporation. The parastatals were not only government owned, but also took shares of the ruling party lines of business. The line of business between government and the ruling party (TANU) was basically blurred, presumably because at that time the political environment was that of a single party regime.

Mwalimu J. K. Nyerere appointed some Asian businesspeople to the boards of parastatals. For instance, J. K. Chande from the Asian business sector was appointed chair of the board of the National Museum and also joined the board of the TANESCO). His milling business was nationalised along with others in 1967, he was made general manager of the National Milling Corporation (NMC) until 1975, and he continued to be a member of parastatal boards for many years.

F Performance of Parastatal Businesses

The rapid investments carried out by parastatal enterprises resulted in an increasing burden on the budget and foreign aid dependence as the performance of the parastatal business sector deteriorated. Parastatal performance has been shown by several researchers to be weak. Coulson (Reference Cooksey1979) examined several parastatal projects (e.g. fertiliser and bakery projects) and found their performance weak, riddled with bureaucracy and inefficiency. Productivity in parastatals was found to be low (Shao, Reference Shao1978; Barker et al., Reference Bacon1986). Clark (1978) finds that large parastatals had low profit rates, at only a quarter of the profit rates of smaller private companies in 1971. Shao (Reference Shao1978) finds that output per employee was higher in Asian-run enterprises (e.g. textiles, grain milling, and sawmills) than in parastatals. Although labour productivity grew up to 1973, mainly as a result of rapid capital investment, this growth could not be sustained (Szirmai and Lapperre, Reference Sokoine2001). Most interestingly, employment in industry increased nearly threefold over the same period – an indication of falling labour productivity (Bank of Tanzania, 1982, p. 114). Jedruszek (1979) finds that productivity in industry declined by 14 per cent between 1967 and 1977. Manufacturing productivity was below average over the period despite large capital investments. Jedruszek suggests that productivity was low because managers had no incentive to control production costs and promote efficiency and productivity while workers exercised their rights and not their responsibilities.

The weak performance of the parastatal enterprises can be interpreted as reflecting limited technological learning, a process that was inhibited by several factors: first, management agreements between government and foreign companies meant that top management was predominantly foreign. For instance, in their survey Barker et al. (Reference Bacon1986) found that three-quarters of top management in parastatals was foreign. Tanzanian management was found to be less experienced and mainly occupying positions of general manager and personnel manager rather than technical and production management. The foreign managerial staff were skilled and experienced but found it difficult to initiate adaptations to Tanzanian conditions. Second, graduate education emphasised theoretical and administrative knowledge, and training was largely for administration. The exception was the Faculty of Engineering, which turned out its first graduates in 1977. Skill development at middle and lower levels was weak, with few opportunities for advancement through in-plant training, or training in other local institutes or abroad. The technical colleges were relatively theoretical and skilled workers accumulated some skills in repair and maintenance but not innovation, design, and manufacture. The strong technical division of labour between mental and manual labour was not conducive for effective technological learning and productivity increase.

From the end of the 1970s, the state tried to reduce the growing cost of subsidisation through a rationalisation programme that involved splitting up existing parastatals into smaller units and attempting to cut down on the overall number of parastatals. These initiatives were largely subverted from within as managers made deals with supportive politicians and bureaucrats within line ministries to expand by establishing new subsidiary parastatals, starting new branches or new areas of activities (Mukandala, 1988).

Poor productivity and lack of financial control led to widespread losses. By 1985, 165 of 354 parastatals had net losses: in output–labour ratio, private firms out-competed parastatals by a factor of two (Bryceson, Reference Bryceson1993, p. 17). The government promised that it would close down loss-making parastatals, and yet this became politically difficult. The government continued to grant them bank overdrafts. Between 1973 and 1982, bank lending to agricultural marketing parastatals grew from 31 to 61 per cent of total lending (Bryceson, Reference Bryceson1993, p. 21). Although parastatals were supposed to make profits, in reality they were subject to a variety of political directives, among which profit-worthiness was not a prime concern. In 1983, a government commission recommended the liquidation of poorly performing parastatals, together with other cost-cutting measures (Bryceson, Reference Bryceson1993, p. 23).

G Political Elite–Parastatal–Private Business Relations

Politicians and employees began to plunder the parastatal sector partly through the manner in which parastatal businesses related to private businesses. While parastatal businesses were favoured in terms of allocation of resources, the private sector enterprises positioned themselves to access some of these resources through the black market. Dealings in the black-market trade earned rents for many private operators. The central leadership group around President Nyerere remained committed to a long-term socialist vision and industrialisation, but rent management was increasingly beyond their control.

Despite the apparent formal political centralisation of power endowed by the dominance of party institutions within the state, the managers of parastatals were able to maintain their hold on state-created industrial rents even when their performance was poor. Systems of performance management and accountability were weak. Managers of parastatals were very much part of the cohesive intermediate class group that ran the single ruling party, TANU (Shivji, 1976; Mukandala, 1988).Footnote ¹ However, the party was not able to discipline this group as it was able to make coalitions with supportive bureaucrats and politicians, especially ministers, to maintain rents despite poor performance (Gray, Reference Gibbon2013).

J. K. Chande (Reference Boudreaux2005) suggests that his experience in running NMC showed that income and wages policy and sometimes the erratic price interventions (e.g. putting a cap on the price of rice for NMC) negated the market forces, precipitating damaging effects. Interference by ministers and lumping unrelated economic activities in one parastatal company, such as bread with wine, complicated the management of parastatals even further. Observing how most parastatals were run, Chande notes that there were not enough entrepreneurs willing to work in the parastatal system, which was dominated by the cautious, doctrinaire, and anti-enterprise line driven by innate suspicion of the market and mistrust of any deals that seemed to be yielding rapid profit. Many businesspeople (Africans and Asians) fell victim to the practice of privileging political doctrine over sound economics and business (Chande, Reference Boudreaux2005). The economy was not geared to making surplus.

H Decentralisation of Management of Rents and Loss of Political Control

The stable and inclusive coalition within the ruling party gave the overall appearance of strength, but central control over the constituent parts was actually quite weak. Parastatal managers increasingly engaged in illegal activities to bolster their falling incomes and racketeering in the form of trading goods illegally at high prices based on their monopoly status (Gray, Reference Gibbon2013). There were clear signs of loss of control and legitimacy as the shortage of goods was threatening erosion of political support. The shortage of goods was becoming severe.

By the mid-1980s, the political consensus on industrial policy slowly consolidated around the conclusion that state-led industrialisation was under threat from weak performance and accountability systems, corruption, market distortions, and the absence of appropriate incentives to encourage reaping of learning rents or Schumpeterian rents. Industrialisation efforts were further frustrated by failures in agricultural production and low productivity in manufacturing’ (Coulson, Reference Collier and Wangwe1982, pp. 194–5; see also Svendsen, Reference Smoke and Lewis1986).

Some political leaders were outspoken in their condemnation of these activities but were relatively powerless to stop them (Maliyamkono and Bagachwa, Reference Leo1990). Initially it was diagnosed that shortages were caused primarily by hoarding by private traders. In 1983, Operation Economic Saboteur, championed by Edward Sokoine, the popular prime minister, led to the imprisonment of thousands of Tanzanian-Asian shopkeepers, but did not affect those who had links to the party (Maliyamkono and Bagachwa, Reference Leo1990). The difficulties that were exhibited in the crackdown and the failure to stop shortages of goods in the market influenced the decision by government to adopt partial trade liberalisation in 1984. Under the government’s own funds import scheme, businesses were allowed to use their own foreign exchange, no questions asked, for importing certain categories of goods, which went a long way to ease some of the economy’s crippling shortages. The shift towards liberalisation culminated in the adoption of the structural adjustment programme (SAP) sponsored by the International Monetary Fund (IMF) in 1986. The adoption of the SAP marked the formal abandonment of the socialist strategy in industrialisation.

In 1985, Julius Nyerere stepped down as president and was succeeded by Ali Hassan Mwinyi, who as president of Zanzibar already enjoyed a reputation as an economic reformer. His election paved the way for a deal with the IMF, a new policy direction, and an evolution in the main types of rent creation and rent-seeking. The shift was made by the Mwinyi government and endorsed by the ruling party with Mwalimu Nyerere as chairman. It was essentially in reaction to an acute economic crisis and the conditionalities of the IMF and the donor community. This marked the beginning of the equilibrium disruption that had prevailed during the 1967–85 period. The emergence of a new equilibrium was in the making.

A Reforms as Response to the Crisis

Generally, the reform and SAP period (1986–95) started with the first generation of reforms essentially focusing on ‘getting prices right’. Macroeconomic policy reforms included reforms in trade policy, exchange rate devaluation, removal of price controls, and removal of subsidies. The adoption of SAPs was perceived as a defeat of Ujamaa ideology, marking the shift towards a more market-oriented and private sector led economy. The SAP policy package aimed to promote efficiency in the productive sectors.

The second generation of reforms focused on the country’s institutional framework for managing development in the context of the market. Emphasis was placed on the institutional framework conditions of public service reform and privatisation that were deemed necessary to support and facilitate the efficient working of the market.

Public service reforms took place partly against the backdrop of maladministration and partly as a result of political patronage having contributed to the bloating of the civil service. Public service reforms had the objective of organisational restructuring, reviewing the management of civil servants, improving the conditions of service, and improving their attitude towards providing greater support to the private sector.

B Privatisation and Politics–Business Relations

An important component of reform was divestiture of public enterprises. Privatisation was conceived as an opportunity to get rid of the burden of parastatals on the budget and to strengthen the private sector. The privatisation programme involved the transfer of assets from the public sector to the private sector. However, the pace of reform was extremely slow (Tripp, 1997, p. 91). Parastatal managers fought with reformers in the government to keep them (the parastatals) under state control (Fischer and Kappel, Reference Estache, Wren-Lewis, Baldwin, Cave and Lodge2005). However, the soft budget constraint was tightened up (Bigsten and Danielson, Reference Bertho2001, p. 72), and many enterprises were divested. The fiscal deficit declined ‘substantially and rapidly’ after 1988 (Bigsten and Danielson, Reference Bertho2001, p. 33). However, in the majority of cases parastatals lost their dominance.

Some parastatals, such as the General Agricultural Export Corporation, were simply wound up. Others, including Tanzania Breweries and Williamson Diamonds, became joint ventures with the private sector. Some of these did very well after privatisation, examples being the sale of NMC to Bakhresa and the acquisition of the Minjingu Fertiliser factory and salt mines by Mac Group.

Debates in the Tanzania Chamber of Commerce, Industry and Agriculture, which were predominantly indigenous, warned against changing ownership in some parastatals in the direction of joint ventures with foreign firms. Such outcry could be an expression of patriotism, but it is also quite likely that the existence of some parastatals benefited the private sector – by operating as a weak competitor by selling inputs at low prices, for example.

A few companies saw management or employee buy-outs, such as Katani Ltd in the sisal industry. In these cases, former managers became owners without paying a fair price. This can be seen as the price of facilitating the development of indigenous entrepreneurs. The approach was one way of promoting ownership by the former managerial group. It may have been an opportunity to reward and promote those few with experience and the knowhow to run the enterprises. It was actually a way of deploying the pool of industrial managers who could use their experience of the industrial process and their political power within the state to manage the industrial activities as private sector operations.

The privatisation programme provided support to domestic indigenous private sector development. In response, an initiative was taken in the early 1990s to form a privatisation trust, which would take care of the interests of indigenous Tanzanians in the privatisation exercise. However, in practice, the trust was not provided with the necessary funding and so it was not operationalised. Although indigenous manufacturing did expand after liberalisation in very small-scale manufacturing, as pointed out by Tripp (1997), this was not an outcome of privatisation. The privatisation process did not promote indigenous entrepreneurs in medium- and large-scale manufacturing. Tanzanians of Asian and Arab origin secured most of the gains, while a small African business class of traders was also beginning to emerge (Havnevik, Reference Green, Legum and Mmari1993; Tripp, 1997). The opportunity created to benefit indigenous domestic private sector development was not harnessed as expected to address the imbalances that had precipitated the Arusha Declaration. This was a missed opportunity of promoting indigenous capitalism. Indeed, in some cases privatisation returned most of the medium- to large-scale industrial activities.

A considerable number of the privatised manufacturing firms were actually sold back to their pre-nationalisation owners (Waigama, Reference Valsecchi2008). For instance, Aluminium Africa, which produced roofing sheets, was sold back to Chandaria Group (Kenya), which had been the former owner (Gibbon, Reference Gastorn1999). The fact that the privatisation process reinforced the ownership of non-indigenous and foreign capital suggests that the concerns that had led to the Arusha Declaration were not addressed in the privatisation process.

The choice was sometimes between granting ownership to local owners and selling the enterprises to higher bidders who were foreigners or other local alien groups in society. The latter group won the bids most of the time as the privatisation trust was not funded adequately to facilitate indigenous Tanzanian owners. The bidding process was decided on the basis of politics, with various factions of the political elite supporting bidders who had sought their support. The possibility of corruption cannot be ruled out even if concrete evidence is not available.

C The Balance between Industrialists and Traders

For years, government subsidies and the opportunities for selling in a controlled market afflicted by acute shortages had been a major source of rents, which some state managers were keen to preserve. Those rents were increasingly threatened since most of the parastatals that survived faced increased competition. The commercial sector was to a large extent let loose during the Mwinyi era, the result of his policy of permissiveness, or ruksa. Many formerly outlawed activities were made legal by the reforms, but that did not necessarily lead to a decrease in smuggling. Critics argued that the measures were stimulating importers to earn easy foreign exchange by smuggling prohibited exports such as minerals and wildlife products (Tripp, 1997). Whatever the truth of the matter, the Mwinyi era was a period in which traders (importers and exporters) made large profits. Traders were in a more favourable position than industrialists and other long-term investors. Some enterprises abandoned industrial production and were turned into godowns (warehouses) for traded goods. For instance, the Tanzania Shoe Company was turned into a godown for stocking imports, including shoes. This is a manifestation of the response to the influence of trade liberalisation on the balance between traders and industrialists. The trade liberalisation favoured traders and importers in particular at the expense of industrialists. The surge in the import/GDP ratio, which reached almost 50 per cent in the early 1990s, is a manifestation of this imbalance (Bourguignon, Chapter 2, this volume).

The implications for industrialisation deserve to be reflected upon. An implicit assumption of economic reforms and industrial restructuring was that enterprise-level inefficiencies are a reflection of distorted or inappropriate macroeconomic policies. It was suggested that if appropriate adjustments could be put in place at macro-level, enterprises would receive the right signals through the market. In response to these signals, enterprises would restructure appropriately (World Bank, Reference Wade1981, Reference Waigama1987). Various industrial studies have revealed that restructuring the industrial sector entails much more than macroeconomic management. Studies of the industrial sectors in several African countries (UNIDO, Reference Tilley1988, 1990) have confirmed that the problems of industry cover all levels (macro, sectoral, and plant) and all aspects of performance (including economic, financial, managerial, technical, and marketing). In his study of the performance of the Tanzanian textile sector, Peter de Valk has demonstrated that performance of enterprises is determined not only by macroeconomic factors, but also by international factors, sectoral policies, and characteristics at firm level, and that all these levels interact in a complex way (Valk, 1992).

However, in Tanzania, proactive trade liberalisation was so rapid that the assumption that economic reforms and industrial restructuring would occur at enterprise level did not hold. Although much inefficiency may have been a reflection of distorted or inappropriate macroeconomic policies, macroeconomic stabilisation was not sufficient to enable enterprises to respond and adjust accordingly. Instead, many enterprises closed. This phenomenon has been known as deindustrialisation. However, the experience of Vietnam, for instance, shows that it is possible to undergo reform without experiencing low growth and deindustrialisation. Having introduced reforms in 1986 – the same year Tanzania adopted the SAP package – Vietnam’s annual rate of GDP growth over the period 1990–2000 was 7.9 per cent, which was exceeded only by China’s 10.6 per cent (Thoburn, Reference Thoburn2013). The main challenge is that the Tanzanian political elite did not balance appropriately the interests of industrialisation and trade. Trade was favoured, while industry experienced deindustrialisation.

D Political Elite Engagement in Business

Many members of the political elite had been running private businesses on the sly for years, circumventing the leadership code under the Arusha Declaration. However, this was legitimised in 1991 by the Zanzibar Resolution, which overturned the Arusha Declaration’s Leadership Code (Gibbon, Reference Gaddis, Morisset and Wane1995, p. 14). Those with political connections fell over themselves to acquire land, the assets of former parastatals, and seats on private enterprise boards, and to generally use their public positions to make private gains in any way they could. The political elite engagement in business became more significant during this period, with political positions being increasingly associated with corruption in political elections and the peasants and workers representation progressively being squeezed as it was becoming costly to seek votes for political leadership positions because of the increased amounts of money involved in campaigns (Gibbon, Reference Gaddis, Morisset and Wane1995, p. 13). The use of money increasingly became an important factor in ascending to political leadership positions.

This period witnessed more open participation of the private business sector in the policymaking process. The private sector revived its representation in the form of specific trade and industry associations. However, these associations were still weak and most of the business deals were arranged and negotiated between individual businesses and the political elite. Big corruption scandals, especially those associated with natural resource rents, emerged on a wide scale. The Mwinyi era witnessed unprecedented scandals. In the most notorious instance, improper discretionary tax exemptions originating in the Ministry of Finance in 1993–4 led to a large fiscal deficit and the freezing of much foreign aid (Bigsten and Danielsson, Reference Bertho2001, p. 20). There were equally massive abuses of a government import financing a counterpart funds scheme. Another example was the notorious so-called Loliondogate scandal, which concerned the lease to an Arab general of a crucial section of the Ngorongoro game reserve for hunting (Gibbon, Reference Gaddis, Morisset and Wane1995, p. 16). But there were many others. The outbreak of the aforementioned tax exemptions scandal in the Treasury and misuse of import support funds suggested that even the Treasury was not successfully centrally controlled. It is in the context of these new heights of corruption that the use of the anti-corruption campaign slogan by the CCM presidential candidate in 1995, Benjamin Mkapa, was attractive to the electorate.

A Long-Term Development Agenda Revisited

The fourth period consisted of consolidating reforms and (re-)establishing a developmental state in the context of a full market economy. Growth had been fast at the beginning of the socialist period. After a long period of crisis and adjustment, it returned to its post-independence level, and has been fluctuating at around 6–7 per cent since 2000.

From the mid-1990s, the government started to rethink the short-term recovery programmes and decided to revert to addressing the long-term development agenda. The Sustainable Industrial Development Policy (SIDP, 2020), spanning 1996–2020, and Tanzania Development Vision 2025, spanning 2000–2025, were formulated in this spirit. The twenty-five-year SIDP 2020 was designed to initiate the process of structural transformation through industrialisation and enhancing sustainable development of the industrial sector. It would formally recognise the private sector as the main vehicle for making direct investments in the sector, while the government would provide an enabling environment and investments that crowd in (invite) private sector investments. The main contents of SIDP 2020 were later subsumed in the development of Tanzania Development Vision (TDV) 2025, the main guide to national development frameworks in Tanzania, envisioned as a middle-income country with a strong, diversified, and competitive economy.

According to TDV 2025, the private sector was to be given greater space in development, with special attention to empowering the relatively weak indigenous private sector. The disadvantaged position of the majority of the indigenous population and other vulnerable groups in society was to be addressed through economic empowerment by undertaking affirmative action programmes to empower these groups. It is in this context that the National Economic Empowerment Policy and Strategy were formulated in 2004.

What is striking, however, is that despite the formulation of SIDP 2020 and TDV 2025 envisioning the realisation of a semi-industrial economy by 2020/2025, growth during this period relied relatively less on industrialisation than during the socialist period in the 1970s. Growth in the post-1996 period was driven more by construction, telecommunications, and trade than by industrialisation. Although slowly increasing, the GDP share of manufacturing has not changed much since the late 1970s. This is an issue of concern, as the present long-run development plans of Tanzania are expected to rely heavily on substantial progress in labour-intensive industrialisation.

B Industrialisation and Politics–Business Relations

This raises the issue of the obstacles to industrialisation. There is an inadequate business climate – weak infrastructure, cumbersome administration, and corruption – which prevents entrepreneurs developing manufacturing and other long-term investments. The informal relations between the political elite and some big businesses undermine efforts to achieve a generalised improvement in the investment climate. The business elite is attracted by other activities, such as trade, that are more amenable to negotiation of taxes paid, and in which the payback period is relatively short, consistent with the election cycles. More generally, the imbalance between industrialisation and trade has continued to favour trade. Experience has shown that imports of some agricultural products based on low tariffs, such as rice and sugar, make local production less profitable and prevent long-term investments that are required to realise the development of the domestic agroindustry. In short, the Tanzanian economy has done rather well since the turn of the century, but it could do better, in particular by giving more weight to industrialisation, possibly in connection with agroindustry.

The question is whether the obstacles to moving in that direction can be found in pure government failures, that is, wrong allocation of public investments and low state capacity, or in the lack of appetite of local entrepreneurs and the lack of attractiveness of Tanzania to foreign investors. In this regard, the argument developed earlier in this volume (Chapter 2) that transport, communication, and construction cannot be powerful engines of growth because their growth depends on the domestic demand side of the economy is relevant. There is a need to develop the tradable sectors, such as industry and agriculture. Agriculture, for instance, would produce raw materials for industry as well as exports to earn foreign exchange needed for industrialisation.

The Agricultural Sector Development Strategy (ASDS) was developed in 2001 in order to address the constraints/challenges facing the sector in a holistic manner.Footnote ² The vision of the ASDS is to have an agricultural sector that by the year 2025 is ‘modernized, commercial, highly productive, utilizes natural resources in an overall sustainable manner and acts as an effective basis for inter sectoral linkages’ (URT, 2001, 32). Commercialising the predominant smallholder agricultural subsector and accelerating its growth rate are critical in achieving the noble goal of pulling the majority of the rural poor out of abject poverty. The question remains as to what kind of business–politics relation is more likely to result in the development of these productive sectors.

It is also possible that there is an issue of competitiveness in the Tanzanian manufacturing sector and the kind of support by the government given the bad experience with the parastatals, or the suspicion that the private sector will divert that support for its own use.

Successful development needs to have the right political base to influence implementation of the developmental policies. The relative power of groups within the private sector, such as traders and industrialists, has continued to favour traders. Tariffs to protect domestic industry are in place and are generally sufficient during this phase. However, effectiveness in implementation continues to be low, largely because of corruption, and tax assessment continues to be characterised by corruption, extortion, and arbitrariness.

A survey of fifty large industrial companies found that twenty-nine had their origin in the domestic private sector, while twenty-one firms were set up by foreign firms and/or the government (Sutton and Olomi, Reference Smoke2012).

A number of firms that had been involved primarily in trading activities during the socialist period bought up industrial parastatals. The survey by Sutton and Olomi (Reference Smoke2012) found that, out of 50 large enterprises, 12 were trading ventures that had shifted to industry, having used the capital accumulated in trade to finance industrial enterprises. It also found that they had benefited from transferring a well-functioning medium-sized organisation (organisational capability) and access to markets and knowledge about markets. The likes of Bakhresa and Mohammed Enterprises belong to this category. This process of transforming commercial capital to industrial capital is a positive sign towards industrialisation. Mohammed Enterprises, which is active in textiles, beverages, edible oils, soap, agro-processing, grain milling, food, bicycles, energy, and petroleum, was founded as a trading company. The firm’s move from trading to industrial processing came in 1998, when it established several businesses in agribusiness and manufacturing. The trading division remains the largest business within the group, dealing with the import of over twenty industrial and consumer commodities. The Murzah Group started as a trading activity, and from 1997 diversified into industry, establishing an oil manufacturing plant and producing cooking oil and soap for the local market. The plant operation draws on technological expertise from Alfa Laval (an Indian firm), supported by technology from Tetra Laval (of Sweden). Motisun Holdings, which has interests in steel and assembly, engineering, plastics, paints, beverages, hotels, and real estate, originated as a trading enterprise in the 1970s and diversified into manufacturing. MM Integrated Steel Mills Ltd has entered into a joint venture agreement with the National Development Company Ltd for mining of iron ore and coal, with forward integration into sponge iron in southern Tanzania, with a view to making Tanzania only the third country in Africa to produce its own iron ore.

The privatisation process of the 1980s and 1990s facilitated the rise of industrialisation through the private sector. For example, Mohammed Enterprises expanded its manufacturing activities by buying up industrial parastatal assets. Bakhresa grew from a small firm in the 1970s, acquired NMC, and diversified around food processing. In 1988, the government decided to sell a flour mill (NMC) as part of its privatisation programme. The enterprise invested in more modern technology, raised the mill’s capacity from 50 metric tons (mt) per day to 240 mt per day, and has continued to diversify into other industries such as bottled water in 1988 and fruit juices in 2006. Mac Group, which had started as a trading company before independence, diversified into industry in 1976 and continued to expand and diversify (Sutton and Olomi, Reference Smoke2012). It benefited from the privatisation of the salt mines and Minjingu mines but kept on investing to stay competitive. Tanzania Breweries, which had been nationalised in 1967, was privatised in 1993, with 50 per cent sold by the government to SAB Miller Africa and 5 per cent sold to the International Finance Corporation. Since then, it has been modernised and expanded.

There are industries that started before independence, were not nationalised, and have continued to expand until now. For instance, Sumaria Group began as a small general trading business in Kenya in the 1940s, extended to Tanzania in 1957, and continued to expand, starting with plastics and diversifying into other industries through the period. Since 1975, the company has established or acquired some twenty-five companies in the areas of plastics, pharmaceuticals, clearing and forwarding, food processing, edible oils, soaps, cement, wheat flour, confectionery, textiles, real estate, soft drinks, dairy, and sisal. It has grown into a widely diversified multinational firm in the process (Sutton and Olomi, Reference Smoke2012). Sumaria Group aims at world-class manufacturing and service standards by developing strategic partnerships with leading regional firms.

There are cases where industrialisation through cooperatives has been a viable option. For instance, Tanzania Instant Coffee Company was established by the government, and from 1966 to December 1982, foreign experts appointed under a management agency contract manned the factory. Since 1982, the company has been managed by Tanzanians. In 2005, the ownership was diversified, with the majority ownership changing hands from the government to Kagera Cooperative Union, which has a 54 per cent share. Other shareholders include Karagwe District Cooperative Union, Tanzania Federation of Cooperatives, the government, and the firm’s employees (Sutton and Olomi, Reference Smoke2012). The company operates the only instant coffee factory in East and Central Africa, for which it has won international awards on several occasions. A key milestone was the organic certification of its products. Another cooperative enterprise is Tanga Fresh, which is a leading dairy foods company created through a Dutch–Tanzanian bilateral programme. It began in smallholder dairy extension services in 1985, leading to the formation of the Tanga Dairies Cooperative Union (TDCU) made of thirteen primary societies. In 1996, a group of Dutch farmers entered into a joint venture with the TDCU to establish Tanga Fresh, which began in 1997 with a modest processing factory and continued to expand and diversify beyond fresh milk and fermented milk into plain and flavoured yoghurt, mozzarella cheese, butter, and ghee (Sutton and Olomi, Reference Smoke2012).

Promising industrialisation initiatives have taken place. The question is whether they are likely to continue and be sustainable. The shift in the pattern of industrial ownership from state to the private sector did not insulate industrial subsidisation from the types of corruption that were seen to have hampered industrialisation under socialism. The manner in which the formal and informal relationship between the political elite and business evolves will be determinant. During this phase the persistence of corruption is likely to have reduced the speed of industrialisation, and, unless it is checked, implementation of the industrialisation agenda is likely to be hampered.

C Formalisation of State–Private Sector Relationships

Liberalisation heralded the development of more open relationships between domestic capital and the state. The resurgence of the private sector was accompanied by a gradual inclusion of businesspeople within the formal framework of the ruling party. Formal institutions linking the private sector and the state were established, such as the Tanzania National Business Council (TNBC), constituting both private sector and government officials and chaired by the president.

The engagement of businesspeople in politics was enhanced by formalisation of the Zanzibar Resolution (1991) by removing the leadership code, and one response to it was the increasing number of CCM members coming from the private sector (Mmuya, 1998). The informal relations that had been constructed between state and capital through clientelist relations towards the end of the socialist period grew stronger. The implication is that corruption became increasingly apparent in this consolidation period. In his campaign, Benjamin William Mkapa promised to fight corruption. In 1995, President William Mkapa was elected and by January 1996 he appointed a presidential commission against corruption to assess the state of corruption in the country. Known as the Warioba Commission, this produced the Warioba Report in November 1996. In its analysis, the report distinguished grand corruption and petty corruption and areas/environments where corruption was occurring. The report also revealed the mechanisms (e.g. regulations and procedures) that facilitated corruption. Despite the commission’s findings, numerous cases of grand corruption came to light over this period and were reported in the media. These were indicative of the close informal relations between the political elite and key business figures (Gray and Khan, 2010).

D Politics of Indigenous and Non-Indigenous Business

An issue that was not resolved by privatisation was the political economy concern relating to the dominance of non-indigenous Tanzanians in the industrialisation process, an issue that had contributed to the timing and content of the Arusha Declaration. By 2002, Tanzanian Asian capital accounted for around 26 per cent of all manufacturing firms (Chandra et al., Reference Bourguignon and Platteau2008). Out of the fifty large enterprises that were surveyed by Sutton and Olomi (Reference Smoke2012), only one, Bonite Bottlers, was found to be owned by an indigenous Tanzanian (Reginald Mengi). Bonite Bottlers is part of the IPP group of companies and produces Kilimanjaro Drinking Water, the leading bottled water in Tanzania. The IPP group has diversified into other areas, such as mining and the media sector.

The difficulties of imposing discipline on the political elite’s rent-seeking networks seem to be insurmountable. Mushtaq Khan has recently argued that the ruling party, CCM, does not take advantage of its favourable political stability and strong organisational capacity to pursue a broad-based capitalist growth strategy because of the weakness of African capitalists. The more capable capitalists in Tanzania were, and remain, of Asian, Arab, or European origin, and, he argues, placing them at the centre of a growth strategy would be politically contentious. So far, capable Africans have been more interested in capturing political rents and rents from investments in real estate and short-term earning services than creating industrial ones. While single deals with short-term payoffs are possible, ‘a long-term relationship between individual capitalists and political patrons is necessary for black African capitalists to emerge and grow’ (Khan, Reference Joshi and Gaddis2010, p. 125). As a possible solution, Khan advocates formulating an active industrial policy for an indigenous business class. In the 1970s and 1980s, SIDO nurtured indigenous industrialists into relatively successful enterprises such as Northern Electrical Industries. These indigenous industrialists emerged from targeted potential industrialists who were supported with capital, training, technology and markets. The successes that were recorded suggest that a proactive empowerment programme stands a chance of supporting and nurturing indigenous industrialists.

E Politics and Foreign Business Relations

FDI into industry expanded under liberalisation. By 2008, the manufacturing sector accounted for around 21 per cent of total FDI in stock. In addition, FDI in the mining sector accounted for around 28 per cent of total FDI. However, the ability of the state to manage FDI has been limited. As a result, it has added little to new industrial capabilities and its contribution to manufactured exports has been even less successful (Bank of Tanzania, 2009). Industrial deepening did not happen through inviting FDI, as had been envisaged. This may be explained by the fact that FDI came predominantly to firms where capabilities had already been established during the previous period of state-led industrialisation, rather than to establish new industrial activities. The explanation for this outcome could be twofold. First, FDI was invited for its promise to bring in capital with no specific strategic requirement for technology transfer and technological capability building. Second, FDI was not strategically invited into priority sectors where technological capability building was most needed. In the absence of strategic policies to guide FDI into technological capacity-building activities, FDI caught the low-hanging fruit and had no incentive to invest in more technologically oriented sectors.

Promotion of industrial exports has been expressed in the form of Export Processing Zones (EPZs). However, industrialisation under EPZs has faced challenges of implementation. After the first zones had been established, the total number of firms operating inside the physical EPZs remained very low. A World Bank survey of EPZs in Africa identified that the clearance times within Tanzanian EPZs were actually worse than for manufacturing firms outside EPZs (Farole, Reference Estache and Bourguignon2011). Another challenge associated with developing industrial exports through EPZs is the management and implementation of incentives provided to ensure that firms in EPZs are fulfilling their export requirements.

F Corruption: Informal Politics–Business Relationships

Corruption can also be an inhibiting factor in industrialisation, especially in changing the relationship between industrialists and traders in favour of industrialists. Corruption in Tanzania has been widespread, and can be broken down into the categories of looting, and predation and rent-seeking.

G Transparency without Accountability and Erosion of the Ruling Party’s Credibility

During this period, institutionalisation of transparency was enhanced and institutions of governance were created, but accountability challenges persisted. While macroeconomic management continued to be consolidated, management of government expenditures and off-budget resources permitted a large share of the rents to be appropriated as corruption, primitive accumulation, or patronage spending (Cooksey and Kelsall, Reference Clark2011). Indeed, a lack of discipline with respect to grand corruption was quite apparent. This situation is not consistent with successful implementation of a long-term development agenda and industrialisation in particular. The opaque relationship between politics and business aimed at maximising the profits of the latter became more transparent, but the top political leadership did not support accountability wholeheartedly.

The several cases of corruption, the exposure that followed, and the little action that was taken eroded the popularity of CCM, the ruling party. For example, Twaweza’s ‘Sauti za Wananchi’ (Twaweza’s ‘Voice of the Citizenry’) surveys indicate a drop in approval of the performance of public leaders, with the president’s approval ratings falling from 45 per cent in 2012 to 31 per cent in 2014, and similar or more dramatic falls in the approval ratings of the prime minister, MPs, and village/street chairpersons and councillors. The situation even threatened the chances of CCM winning the next elections in 2015. This erosion in popularity of the ruling party was felt by party members. This situation is demonstrated by four developments. First, the TEA saga resulted in the PAC (with majority CCM members) putting pressure on the Executive. Although the Executive was not willing to be held accountable, a few members of the Executive were sacrificed through sackings and forced resignations. Second, in the elections of councillors in 2014, the TEA scandal and other corruption incidents were widely used to discredit CCM as a corrupt party. CCM lost more seats than ever before. Third, during the screening of CCM presidential candidates in 2015, corruption became an important consideration for decisions within CCM. Although reasons for disqualification of some prominent candidates were not given explicitly, it is widely believed that this was because of corruption. Fourth, the CCM presidential candidate, Dr John Magufuli, made anti-corruption a main campaign slogan. In his campaigns, he emphasised what he would do to fight corruption rather than what CCM would do about it. The opposition candidate Edward Lowasa, who had crossed from CCM to Chadema, was silent on corruption in his campaigns, possibly because he had resigned as prime minister in 2006 on allegations of corruption, which had an effect on how the electorate was perceiving him.Footnote ⁴ These developments all marked the waning of the kind of relationship between business and politics that had prevailed for three decades. That equilibrium was coming to an end and a disruption was imminent, either by CCM losing the elections or by CCM making decisive changes internally. The latter option was taken.