A key part of the East African growth complex, Tanzania is beginning to shed its reputation for being home to a backwards form of African socialism and gaining ground as a bustling center for trade and commerce.
Given Tanzania’s fantastic array of ethnic diversity and the fact that the country is an agglomeration of lands once ruled by Imperial Germany, Britain, and the Kingdom of Oman, this is somewhat surprising.
What explains Tanzania’s recent success?
First it’s important to recognize the pivotal role that Tanzania’s first president, Julius Kambarage Nyerere, played in the country’s history. Nyerere, who led British-ruled Tanganyika to independence in 1961 and oversaw the country’s union with neighboring Zanzibar in 1964, ruled as a socialist autocrat who took ideological inspiration from Maoist China.
The result, of course, was disastrous. Peasants were forced from their villages – which were often burned by the army so they could not go back – and sent to collective farms where they labored, often in vain, to provide agricultural surpluses for export and eventual development. Resistance, when it occurred, was brutally put down, and while the country turned into one of the poorest and least developed in Africa under Nyerere’s nearly 30-year rule it did have some important, beneficial effects.
First, ethnic division and rebellion in Tanzania was, as result of Nyerere’s one-party rule, not nearly as big a problem as in other African countries. In neighboring Kenya, for instance, inter-communal violence most recently broke out in 2007 and 2008 and caused a major political crisis. To be sure, there are ethnic tensions in post-Nyerere Tanzania, but it is much more subdued and less of a threat to the security of the state and political system than is commonly the case elsewhere on the continent.
Second, Nyerere himself, though ostensibly terrible for his country’s prosperity, did his country a favor by stepping down from power peacefully. He handed off control of the country in 1990 and voiced no opposition to elections and a transition to multi-party democracy in 1992. During this period he played the role of elder statesman, and gradually retired from public life until his death from leukemia in 1999.
Since then, Tanzania has progressed slowly yet surely. As in much of the rest of Africa, corruption is a systematic problem that hampers the effectiveness of political institutions and business operations, but there are nonetheless several bright spots driving economic growth. Among these is an increasing openness to trade, especially with China and India, liberalizing reforms that have shucked off much of Nyerere’s socialist legacy, and the seeming stability of Tanzanian democracy – young, weak, and fragile though it may be.
What are business conditions like in Tanzania?
According to the World Bank, Tanzania currently ranks 128th out of 183 countries globally on its Ease of Doing Business Index – a measure created by the bank to gauge the degree to which businesses encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses.
By way of comparison, the U.S. ranks fourth for ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business, which is depicted in figure 1 below. The bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps an entrepreneur must take to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process in order to establish in-country averages.
When this metric is applied to Tanzania, the bank finds that Tanzania ranks 122nd out of 183 countries for ease of starting a business, making Tanzania a relatively difficult place to start a commercial enterprise.
To start a business in Tanzanian, one has to complete 12 bureaucratic procedures that take a total of 29 days at a total cost of $155, with no minimum capital required by the government for the startup.
While these are fairly benign conditions for outsiders seeking to start a business in Tanzania, given that per capita income is $500, a year it is steep for most native Tanzanians.
Figure 1:
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the bank has ranked Tanzania in a number of other areas.
To obtain a construction permit, Tanzania is ranked 179th out of 183 with 22 required procedures taking 328 days at a cost of $13,500 — nearly 27 times the gross national income — to begin construction on a given property. Clearly, this is a huge problem not only for Tanzanians but for foreigners seeking to start a business as well.
World Bank has determined that to obtain and register property, Tanzania does marginally better by ranking 151st out of 183 countries measured. To register property in Tanzania requires completing nine bureaucratic procedures that take, on average, 73 days and cost 4.4 percent of the property’s financial value in fees and other costs.
Tanzania, however, is a not such a difficult place to obtain credit. It ranks 89th out of 183. Here, as depicted in figure 2, the bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information from bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. In Tanzania, creditors have very strong legal rights which make up for the low amount of information available on most borrowers.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders, Tanzania does a mediocre job, ranking 93rd out of 183 countries. It earned this ranking because Tanzania is a relatively easy place to bring minority lawsuits. Additionally, minimal disclosure laws force some conflicts of interest to be disclosed while board directors are also somewhat legally liable for performance. There is, therefore, some degree of investor protection in Tanzania often lacking in other countries in Africa.
Unfortunately Tanzania doesn’t do as well in the area of taxation. The World Bank estimates that pleasing the tax man requires a total of 48 payments over the course of a year which take up to 172 hours to complete and can consume up to 45.2 percent of a company’s profits. Accordingly, Tanzania’s tax burden is ranked 120th out of 183 nations.
Tanzania is middling when it comes to engaging in cross-border trade. In Tanzania, importing goods into the country requires seven documents for customs officials to inspect. On average, it takes 31 days to import goods into Tanzania at a cost of $1,475 (excluding tariffs) per container shipped into the country.
The cost to export goods is somewhat lower as Tanzania requires only five documents to be inspected by customs officials, while the total cost (excluding tariffs) is $1,262 per container, with delivery taking up to 24 days from point of origin. Compared to global averages this nets Tanzania a ranking of 109th out of 183 countries on ease of engaging in cross-border trade.
Fortunately, Tanzania is generally a good place to do business when it comes to contract enforcement. It ranks 32nd out of 183 countries. On average, World Bank analysts report it takes a total of 38 legal procedures to take a contract from dispute to resolution. The entire process spans 462 days – or about 15 months including time spent in court or attending to legal issues. The financial cost of pursing a contract claim typically accounts for 14.3 percent of the value of the claim.
Finally, in terms of closing or liquidating a business Tanzania does less well though better than many. It takes three years to close an estate at a cost of 22-percent of the value of the estate, for a recovery rate of 21.9 cents on the dollar. This gives Tanzania a ranking of 113th out of 183 countries.
Table 1 presents a summary of these rankings as well as Tanzania’s overall ease-of-doing business rating. As one can see, the most difficult areas of doing business in Tanzania deal with obtaining and developing property. The easiest, by far, is in the area of contract enforcement.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: Tanzania
Tanzania will continue to be in transition as market-based reforms, trade openness, and multi-party democracy play out over the coming years and decades.
So far, this combination has been a boon for Tanzania with growth averaging a steady 6-to-8 percent a year for much of the past decade.
Tanzania’s strategic location on Africa’s eastern seaboard and its relative lack of political instability made it a prime location for investment by Indian and Chinese businesses looking to capitalize on its location and resources. Indeed, the two countries constitute Tanzania’s largest trading partners. China recently announced a $1.7 billion infrastructure development deal with the country.
Tanzania’s lucrative resources include gold and nickel reserves, iron ore, coal, and just recently-discovered natural gas – large deposits of which have been found offshore. Though oil has not yet been discovered, the presence of very large amounts of natural gas has drawn in many major multinational oil companies such as ExxonMobil and Norway’s Statoil, and the hunt is on to be the first to discover major offshore petroleum deposits in addition to natural gas in what, along with many other countries in East Africa, has become a major boom in on- and offshore oil exploration.
Figure 3:
Tanzanian Economic Growth,
Percent Increase, 2003 – 2012
While the prospect of shipping large amounts of minerals and energy to eager markets in India, China, and the rest of Asia is a big driver of current interest in Tanzania, there are other growth opportunities in the country as well.
Tanzania, still mostly a traditional economy in many respects, has a large agricultural sector that, with some investment in infrastructure and market rationalization, could become a major source of food for India and China.
As a result, light manufacturing could also take off as Tanzania eventually moves up the product chain from being a primary-product producer to a source of light consumer and industrial goods.
While there is much promise for the future, certain problems remain. The first is the very low level of development Tanzania starts from. It is in desperate need of infrastructure of all types while the disastrous experiment in socialism from prior decades left the country dependent on outside aid and highly in debt.
If investment and growth continue this problem could diminish but, as the recent global economic downturn demonstrated, nothing is guaranteed. Tanzania remains highly dependent on an outside world it has very little control over.
Second, political stability in Tanzania is one of the country’s major attractions, but it, too, is not guaranteed.
Young democracies are notoriously unstable and while ethnic violence is rare in Tanzania it is not unknown. If growth stalls this combination could become dangerous as politicians and parties turn to identity-based politics for support and legitimacy, compounding any deep economic decline with political instability and conflict.
Finally, though Tanzania has not recently been troubled by much in the way of Islamist violence, it, along with Kenya, was a primary target of the Al-Qaeda network at the turn of the century when the U.S. embassy in Dar-es-Salaam, the Tanzanian capital, was bombed in 1998. Since then, there has been a scattering of attacks by Islamist elements and some unrest in Muslim Zanzibar, but compared to other countries in Africa, the risk of wider revolt remains, for the time being, limited.
