Stevan Lee, Senior World Bank Economist, is co-author of this post.
Attracted by the prospects of large unexploited natural gas reserves in the south of Tanzania, big players are in town. The British Gas Group has publicly announced that it may invest over US$35 billion in the next 25 years – 1.5 times Tanzania’s current GDP. Policymakers and donors are jockeying to position themselves and understand what is at stake.
The excitement is well founded but perhaps a little bit premature. According to the most optimistic projections, revenues from natural gas will not materialize for 5-7 years. Moreover, international experience shows that commodity-driven growth does not guarantee success. The Tanzanian authorities are therefore right to prepare for the future by setting up the fiscal and financial rules required for future transparent and rational use of these funds now. They should not forget also to focus on the coming 5-7 years because the economy is facing a number of challenges.
What is the priority?
The priority should be to find additional drivers of growth. For 2011/12, GDP is forecast to grow around 6 % which is very good in a volatile environment. This growth rate would nonetheless be the lowest since 2000. The energy crisis has affected private activities and the uncertain global environment has made current and potential investors more reluctant to take risks. A few bright spots have emerged such as gold exports (driven by exceptionally high international prices) and regional trade.
Since 2008, the economy has been growing on one engine –public spending. After three years of fiscal stimulus fiscal expansion has come to an end. The gradual deterioration of fiscal and financial indicators has pushed the authorities to adopt a more restrictive stance.
The overall public deficit reached almost 7% of GDP at end 2010/11 and inflation jumped to 20 % in December 2011. Public spending has slowed down, taxes and tariffs have been revised upwards (electricity up by 40%), and interest rates have been increased to curb monetary and credit expansion. This prudent stance is unlikely to reverse in the near future as the source of about 40 percent of growth in public expenditures –official aid- is expected to grow more slowly than in the past, linked to the fiscal crisis in most donors’ countries. Alternative short-term public financing options –such as domestic and international borrowing-- also appear limited in the current volatile context.
The quest for new drivers of growth is further motivated by the apparent lack of inclusiveness of GDP growth over the past decade. GDP doubled in 10 years but has failed to produce any significant decline in the poverty level. This contrasts sharply with the experience in most countries around the world, including Uganda where the equivalent growth performance apparently translated into a cut in half of the poverty level.
Education improvements and vibrant Small and Medium Enterprises (SMEs)
Identifying additional and more inclusive drivers of growth is now at the heart of recent national strategies. The Government’s focus is rightly on private sector development and private-public partnerships. The World Bank First Tanzania Economic Update  stresses the importance of education and small and medium enterprises. Both are important individually, but their combination is essential for accelerated and shared economic growth.
Tanzania has put a lot of financial resources into education, spending about 20 % of its public budget, building schools and hiring teachers. Most children are now attending primary school and an increasing number are entering secondary school. But pass rates remain low (only one of ten students exits the secondary system with success) and, worse, have declined since 2007. Most children are leaving schools without being prepared for the job market. The young people entering the labor force –as much as 1 million per year -- will contribute little to the economy. They might also exacerbate social tensions because their expectations will not be met.
Small and medium firms are often the employer of last resort. The problem is that those firms find hard to blossom in the current business environment in Tanzania. They face numerous bureaucratic obstacles and have little access to information, credit, land, and training. Half of SMEs do not have today access to any kind of financing and only 15 % are capable of securing formal lending. As a result, they have been unable to expand properly and reach out to larger markets even though signs of economic transformation have emerged such as booming manufactured exports and growing financing options for firms . Most SMEs cannot act as the catalyst of innovation and labor productivity which has been one of the keys behind the success of emerging countries
Giving priority to quality in education and SMEs development will build three bridges The first bridge is economic mobility and inclusion. They are the best channels to promote skills, jobs, and then higher income for the majority of Tanzanian households.
The second bridge, linked to the first, is that inclusive growth is self-reinforcing. As more educated households move out of poverty, they will consume more, stimulating demand. They will invest more in human and physical capital and, thus, promote the supply side of the economy.
The third and final bridge is that education and SMEs will help to prepare the future. When revenues from natural resources become a reality, they will have to be managed so they create jobs and raise productivity improvements on a sustainable basis.