ECONOMIC REVIEW | PRIVATE SECTOR DEVELOPMENT
AND CROSS-CUTTING ISSUES|
|SPECIAL DEVELOPMENT ISSUE|
LINKAGE BETWEEN MACRO ECONOMIC PERFORMANCE AND POVERTY SITUATION
177. In the last decade, Tanzania has undertaken a series of economic policy reforms which have contributed to significant improvement in macroeconomic performance (growth, inflation, domestic revenue), social service delivery (education, water), and infrastructure (rural roads). However, the economy continue to face the challenge of pervasive and persistent poverty. The Government has been taking several measures and actions through policies, strategies and plans to address the challenge but much needs to be done in order to register more phenomenal achievements in poverty reduction. It is with this background that the Government of Tanzania has recently promulgated a new strategy namely, National Strategy for Growth and Reduction of Poverty (NSGRP) or MKUKUTA, which focuses on growth to tackle poverty reduction in the longrun.
178. Apparently, the public in general is not very knowledgeable on the necessity and imperatives of growth for addressing poverty reduction. The objective of this chapter is to enlighten on the linkage of growth to poverty reduction as well as underlying policy implications and operational actions which would be more dynamic and effective in addressing the challenge of poverty, in the medium and long-term.
Dynamics of Growth
179. Growth has assumed various dimensions in human history. Viewed traditionally as economic progress that leads to improvement in material well being, growth has assumed dimensions beyond economic considerations to social transformation which includes structural transformation, diversification of production, change etc. This changed view has been influenced by both experience and changing facts and has led to various postulations on the sources of growth. In the 1960s and 1970s, capital accumulation and technological adoption especially in developing economies were seen as the drivers of growth. Experiences however, pointed out the fact that there is more to growth than these two sources. This realization led to inclusion of other dimensions such as importance of domestic policies, role of institutions, and equity.
180. Various strands of economic thinking have approached growth of economies from two dimensions: income side and expenditure side, while analysis using production functions has concentrated on the quantity of inputs such as capital, labour and efficiency of such inputs in the form of productivity changes.
181. The income approach has relied much on the well known National Income Identity and associates growth with consumption (C), both government and private; Investments (I) both government and private; Government Expenditure (G) and exports (E) net of imports (M): Y = C + I + G + (E –M). With this approach, one can go further to decompose sectoral contributions to the growth of the national economy. Thus, the structure of the economy and contributions of the various sectors such as agriculture, industry, services, etc can be discerned in any particular period of time or trends over time.
182. Growth accounting identifies sources of growth as increase in the quantity of inputs (capital, K, labour, L) and increase in the efficiency of inputs (productivity change/technical innovation). Thus, by growth accounting changes in growth of the economy can be explained by changes in the growth of labour, growth of capital and Total Factor Productivity (TFP) which is usually calculated as residual or “left over” (Y growth less %L growth, less %K growth). Growth and
183. The emphasis on growth in the 1960s and 1970s was driven by the classical thinking that growth automatically leads to improved living conditions of the population through sharing national income which grows from year to year. Poverty was conceptualized as an issue of income alone. Once economic growth has been guaranteed, and is high, the “trickle down effect” will automatically address poverty. Little was mentioned on how the income was generated and how it was ultimately shared. Poverty was also narrowly defined and confined to income.
184. Experience and rigorous research work in the 1980s and 1990s showed that while growth is a necessary condition for poverty reduction, it was not a sufficient condition. Paradoxes emerged: in developed countries with high growth and high per capita incomes, there was poverty amid plenty. In some developing countries, where large increases and sometimes fast increases in growth had been achieved, there were increases in the incidence of poverty (irrespective of whether narrowly defined in income terms or broadly defined to include non income poverty) or at most with very marginal reductions in poverty unmatched to the vigor and rigor of economic reforms aimed at increasing growth for poverty reduction.
185. A question often being asked is: “where did all the growth go to?” In other words, who benefits from the growth process? It became apparent that both quantitative and qualitative aspects of growth need to be addressed if growth is to have a dent on poverty. The challenge being how to make sure that broad growth macroeconomic policies influence the microeconomic realities of poverty.
186. For growth to have an impact on poverty reduction, various propositions have been advanced, the strongest being how to pursue pro-poor growth. Three elements characterize pro-poor growth: if the share of the poor in incremental income exceeds their current share; if the poor’s share of incremental income exceeds their share of the population; and that the poor’s share of incremental income exceeds some international norm.
187. As a result of rigorous empirical work in the 1990s, a number of strategies have been suggested towards realizing pro-poor growth:
• Ensuring that capital stock grows at least as fast as labor force;
• Increasing productivity in agriculture/rural areas where the majority of the poor are;
• Ensuring most efficient use of new investment; and
• Opening up the economy to (international) trade.
188. There are potential trade-offs between growth and inequality. High levels of income-inequality limit the effects of growth in reducing poverty. High inequality countries need to grow twice as fast as low-inequality countries in order to achieve same poverty reduction results. Growth-inequality trade off can be addressed through:
• public funding of basic social services;
• re-distributive taxation; and
• agrarian reforms.
GROWTH PERFORMANCE AND POVERTY TRENDS IN TANZANIA
189. Table 10.1 shows growth of the economy since 1965, when earliest possible data are available. We can discern patterns which are associated with policy regime shifts as follows: 1965-1966 when a mixed economy strategy was pursued recording the highest average of 6.7 percent. The period 1967-1985 was dominated by socialist policies. Here we find a decline of growth to a period average of 2.9 percent. The third phase is one of reforms, 1986-2004 with sub-period average of 3.9 percent growth. The latter phase can further be divided into two, 1986-1993 which marked initial phase of reform and the period 1994-2004 which marked intensification of reforms. During 1986-1993 average growth was 3.2 percent while a growth rate of 4.5 percent was recorded for 1994-2004 period.
190. We can assess the association of growth with the factors alluded to on growth accounting. Generally, for the entire period, Tanzania experienced growth in labour productivity and Total Factor Productivity. Taking the two major regime shifts we find high capital deepening during 1967-1985 compared to the reform period 1986-2004. Compared to the record of growth, this means that capital was less productive during 1967-1985 compared to the period 1986-2004. Labour productivity growth declined marginally by 0.4 percent while Total Factor Productivity growth was highest after 1986, implying that the impressive growth performance during 1986-2004 can be associated more with growth in Total factor Productivity as shown in Table 10.2.
191. Estimates for recent years (1990-2003) show the contribution to growth by the different elements to be 1.8 percent by labor productivity, between -0.1 percent and 0.5 percent by capital, and between 0.6 percent and 1.2 percent by Total Factor Productivity. The main sources of growth expenditure-wise are exports followed by private consumption. Transformation of the economy and sectoral contribution
192. Another way of explaining growth is through examining the contribution of various sectors. Table 10.3 provides recent experience.
Table 10.3: Mainland Tanzania: GDP By Economic Activity, 1993-2004: % Growth Rates (At constant 1992 prices)
Source: National Bureau of Statistics
193. When Table 10.3 is compared to Table 10.4, it is seen that fast growing sectors contribute less to GDP. The dominant sector, agriculture recorded between 1.9 percent and 5 percent growth rate, while the sector of mining and quarrying grew between 8.2 percent and 27.4 percent. Since the drivers of growth are not the fastest growing sectors because of the small base from which they grow, it remains a fact that if high and sustainable GDP growth rates are to be achieved then agricultural transformation is a necessity.
194. Table 10.4 shows the influence of different policy regimes on changing the structure of the economy which in turn has implications on growth. As can be seen from Table 10.4, the structure has remained more or less the same, with dominance of the sector of agriculture. It implies that the various incentives provided have not led to structural transformation. This is an indication of existence of rigidities in the economy and pointer to the fact that agriculture will determine growth of the economy in the foreseeable future.
Table 10.4: Tanzania: Structure of Economy Under Different Policy Regimes
Source: Computed from Economic Survey (various)
Growth and poverty trends
195. Despite the impressive achievement in macroeconomic aggregates, progress in poverty reduction was very slow compared to the efforts invested in improving the macro economy. According to the latest Household Budget Survey (2000/01), there was a small fall in income poverty (basic needs) from 38.6 percent revealed by the 1991/92 Household Budget Survey to 35.7 percent (2000/01), a change of 7.5 percent GDP growth, on the other hand, increased from 1.6 percent in 1992 to 4.9 percent in 2000 (206 percent change) (Table 10.5).
196. Table 10.5 also reveals urban-rural dichotomy: progress in poverty reduction has been relatively fast in urban centers compared to rural areas. For example, between 1991/92 and 2000/01, while food poverty declined by 6.1 percent or 44.9 percent change in Dar es Salaam, in rural areas it declined by only 2.7% or 11.7 percent change.
197. The poverty situation also reflects the situation of females. There was an overall increase in the percentage of female headed households by 5.3 percent (30.1 percent change), females with no education by 0.2 percent (0.6 percent change) and widows by 1.6 percent (4.9 percent change). These are attributes that manifest poverty. Rural-urban differences are more pronounced in education: while the percent of females with no education declined in urban areas between 1991/92 and 2000/01 by 1.1 percent in Dar es Salaam and by 1.0 percent in other urban areas, in rural areas there was an increase of 1.1 percent.
Table 10.5: Poverty Trend in Tanzania: 1991/92-2000/01
Source: Household Budget Survey 2000/01
198. What the comparison of growth and poverty trends reveals is that much of the growth between 1991/92 and 2000/01 did not translate into poverty reduction. In other words, the growth process was not pro-poor.
Assessment of recent growth performance
199. Figure 10.6 shows trend of growth for the period 1992-2004. There has been a general upward trend after a downswing in 1993 with downswings at higher levels in 1997 and 2003, implying volatile growth though the volatility is not very pronounced. When matched with Table 10.3, these were years of dramatic decline in the growth of the sector of agriculture.
Figure 10.6: Growth of the Tanzanian Economy: 1992-2003
200. The lesson to learn and challenge to overcome is on how to contain volatility in GDP growth. Since GDP growth closely matches with agricultural sector growth, it means that containing GDP growth requires stabilizing growth of the sector of agriculture. This involves removing any remaining distortions and addressing the most binding constraints to agricultural growth. These have been identified as low level of technology, transportation bottlenecks, inadequate capital.
Inequality and growth
201. As pointed out, high levels of income inequality limit the effects of growth. Evidence from the 2000/01 HBS shows that inequality as measured by the Gini coefficient rose from 0.34 in 1991/92 to 0.35 in 2000/01. Further, the consumption of the richest 20 percent increased from 43 percent in 1991/92 to 44 percent in 2000/01. Though a high threshold has not been reached (about 0.4 percent), this rising inequality has to be arrested as it undermines pro-poor growth and poverty reduction.
Emphasizing growth for poverty reduction
202. Traditionally, Tanzania had relied much on distributive policies to fight poverty. This worked so long as resources allowed. Following the unprecedented economic crisis that unfolded towards the end of the 1970s, financing of basic social services by the state was undermined leading to stagnation and even reversals in social achievements. It is, thus timely for the National Strategy for Growth and Reduction of Poverty (NSGRP) to emphasize growth as a critical element in poverty reduction.
GROWTH PROSPECTS 2005 - 2010
203. Over the past decade, Tanzania has experienced acceleration in GDP growth of over six percentage points from 0.4 percent in 1993 to 6.7 percent in 2004. The National Strategy for Growth and Reduction of Poverty aims at achieving and sustaining broad-based and equitable growth. An accelerated GDP growth rate of between 6 percent and 8 percent per annum is targeted. The 2005/06 Macroeconomic Policy Framework growth projections are 6.9 percent in 2005, 7.2 percent in 2006, 7.6 percent in 2007 and 7.9 percent in 2008. These growth rates are achievable if one has to go by the growth performance in recent years.
204. However, in order for Tanzania to be able to achieve the twin targets of growth and poverty reduction, the following need to be taken fully into account:
• Maintaining macro stability
The analysis of long term growth trends (Tables10.1 and 10.2) revealed improved growth rates during the reform period. It is thus, imperative to maintain the momentum of reforms in order to protect growth. Since domestic policies and institutions are important in achieving growth, reforms in these areas need to be sustained and refined. Macroeconomic stability needs to be maintained in a manner that is sustainable and pro-growth
. • Containing volatility in economic growth
Though growth in the past decade has been on an upward trend (Figure 10.1) there are signs of volatility, albeit not in large magnitudes. This needs to be contained since a volatile and un-sustained growth brings divergences between growth and welfare improvements. As agriculture accounts for much of GDP, increased investment in agriculture is required in order to solve critical constraints to production and marketing.
• Improving export performance
Exports are the main source of growth expenditure-wise. Trade policy needs to be pursued in a manner that recognizes the central role of exports as a growth strategy. This calls for promotion of regional trade arrangements, Export Processing Zones and greater integration with the world economy.
• Refining investment climate in order to increase participation of private sector
Private consumption is the second significant source of growth. Promotion of private sector participation will enhance growth. Actions that need to be taken include implementation of the Business Environment Strengthening for Tanzania (BEST) Programme and easing constraints that constrain private sector participation (commonly cited as unreliability of power and water supply, poor state of physical infrastructure, poor governance, inhibitive tax regime etc).
• Containing increasing inequality
High inequality undermines the potency of growth in reducing poverty. Tools of correcting for inequality include re-distributive taxation, public funding of basic social services, and agrarian reform.