Unlocking an economy: Can we dare to dream? – Part II

“Agriculture is the source of accumulation, from here we have to develop to an industrialized country and to get there we should think through, plan and put strategies in place. Unlike other countries which are forced to import raw materials, our country has all the raw materials necessary for developing our industries,” Mr. Kikwete was quoted saying.

This remains true, no matter how disturbing others will find it, and this is the state the sector is currently in.

When Mr. Peter Allum visited Tanzania two weeks ago, as part of an IMF Mission to Tanzania, he remarked, “Despite recent power shortages, Tanzania’s economy continues to grow strongly, expanding 6.3 percent in the first half of 2011.” On a similar note, the CIA World Fact Book says “Tanzania average 7% GDP growth per year between 2000 and 2008” was a result of “strong gold production and tourism,” and that “GDP growth in 2009-10 was a respectable 6% per year due to high gold prices and increased production.”

We hear a lot about similar GDP growth rhetorics. But what do they mean really? At worst, GDP growth rates are simply numbers that, as the case with Tanzania, may be accounted for by only one sector. Tanzania is essentially an agricultural country. (I may have read that the mining sector employees about/less than 2% of Tanzanians. Sorry, I could not find the exact figure.)

My previous post asked several questions, including one about why, with such a ‘respectable’ GDP growth, the country is still one of the poorest. This is an unsettling fact that prompts me to try and unveil the deadlock.

There is a nice story that everyone talks about. It is like a fairy tale, and it is the story about the Asian Tiger Economies. During the 1960s – 90s, these countries recorded extraordinary strides in economic growth. For example, Singapore, from 1970 – 93, grew at an average GDP growth rate of eight percent. In 1993, its per capita GDP had improved twenty-fold from US $900 in 1970!

Backed with a high human capital and high savings rate, the governments of the Asian miracles — Hong Kong, Indonesia, Japan, the Repulic of Korea, Malaysia, Singapore, Taiwan and Thailand — took an active role in shaping their economies. A high physical and human capital accumulation, and a market-oriented economy are attributable to the sustained economic wonders the world witnessed from the Asians. In fact, just like China is highly speculated to become the next super power, countries such as Japan were projected to overtake the US  — that has not happened. We are yet to see whether China will become a super power due to a need for greater political command a world super-power needs, and a more efficiency in unit output per unit input. (China’s high population, only second to none, however, puts the analysis of its economic growth at a different perspective, not so comparable to Japan’s in the 1960s – 1970s.)

An emphasis on human capital accumulation through intensive investments in education, interacting with technology transfer that was obtained through a direct purchase, and educating large numbers of skilled engineers who would “absorb and adapt the most advanced technology,” has greatly contributed to the extraordinary East Asian growth. They also accepted foreign investment that came with new technology by creating conducive environments.

The theory of economic growth tells us that countries that win in the three areas of physical and human capital stock accumulation and technology, supported by high savings rate, will be set to see economic wonders. It would be a sad thing to refute this wisdom hard garnered by macroeconomists for more than one hundred years of research.

So, why don’t we just invest in capital accumulation — both physical and human — that will ultimately set us to an economic miracle? One simple answer is that it’s expensive and poor Tanzania is broke. Machines, the construction of roads, schools, employment of educators, improving or building new laboratories cost money. Another reason is that both the government and the society change with time. The question of evolving environment and government to the sustainability of growth is of the essence. As Joseph E. Stiglitz writes, a government that adapts its policies to suit the changing environment can learn from previous mistakes and its role changes adopting policies to “promote higher levels of technology and higher value-added industries.” Note the roles of the government portrayed in this paragraph: that of adaptibility and that of an investor.

To account for the economic growths of the East’s miracles, it can also be put forth that, this success came out of luck with individuals and profit-maximizing firms leading the way while the government remained auxiliary. Stiglitz puts similarly that “individuals had (perhaps rational) expectations concerning future rates of return; given those expectations, they determined their saving rate; meanwhile, profit-maximizing firms scoured the world looking for the best products and technologies to employ, given the costs of adjustment.”

The role of the government in an economy is highly debatable. There are those who draw motivation from Adam Smith’s “invincible hand,” there are those who prefer regulation and those who stand in between. Like socialist Russia in the 1950s that ultimately collapsed, countries that either followed strict government interventions in the market, free-marketeers or strictly planned their economies, failed. On the other hand, however, countries that saw economic wonders, writes Stiglitz, as if they had better learnt from the failures of socialist Russia, followed none of these systems. Borrowed from the theory of market failures, he writes, for a market to “yield efficient outcomes,” several conditions must be satisfied: “the absence of externalities and of public goods” and “presence of markets extending infinitely far into the future and covering all risks.” Meeting these conditions asks for a “well-defined, highly circumscribed role” of the government.

Even though market failures can sometimes not be prevented, Eastern countries managed to rescue their economies from collapsing by having the government have the following roles: “Ensure macroeconomic stability,” make “markets work more effectively by, for instance, regulating financial markets,” create “markets where they did not exist,” help “to direct investment to ensure that resources were deployed in ways that would enhance economic growth and stability,” and create “an atmosphere conducive to private investment” and “ensure political stability.”

A lot has been written about the Asian Tiger Economies. Given Tanzania’s current economy, I conceive of the following to be of import in achieving a deserving sustained growth that will see an exalted and equitable per capita GDP growth. First, we need “an Industrial Strategy for Tanzania.” Second, we need to pull off a modern financial services industry. Third, improve our domestic competitiveness (I discuss a synopsis here). Fourth, we need a GDP growth that accounts for the wealth of our people. Fifth, we need a better defined role of the government, and last but not least, we need to keep an eye on inequality. The order is impotent.

So, can we dare to unlock Tanzania’s economy? Can we have our own economic growth model? Can we replicate what has worked before? What role can our government play in all this?