Economic reform

Economic Reform and Investment in Job Creation to Harness the Demographic Dividend in Tanzania Key messages:  Tanzania’s economy has experienced remarkable growth over the past decade, but there has not been a corresponding decline in unemployment and poverty.  The agricultural sector accounts for the highest share of GDP and employment, yet productivity in the sector remains low.  Unemployment is particularly high among youth and women. Youth unemployment is attributed to their insufficient employable skills and the low supply of jobs.  To improve economic productivity and job creation, Tanzania should focus on: o strengthening technical and social skills of the youth to prepare them for employment and start businesses o improving economic infrastructure and business environment to stimulate the growth of the private sector o Modernizing agriculture by investing in value addition.

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Economic Reform and Investment in Job Creation to Harness the Demographic Dividend in Tanzania

Acknowledgment This Policy Brief is derived from the report of the Tanzania Demographic Dividend study, which was supported by Pathfinder International-Tanzania, with technical contribution from the Department of Economics, University of Dar es Salaam, and the African Institute for Development Policy (AFIDEP).

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Context Tanzania’s long-term development plan, Vision 2025, seeks to transform the country from a least developed to a semi-industrialized middle-income country with a modernized economy and high-quality human capital. Over the past decade, GDP has been growing at the average rate of 7% per year.1 This relatively high growth rate has been mainly due to economic and financial reforms and prudent monetary and fiscal policies; all of which promoted domestic and foreign investment. The discovery of gas and the telecommunication boom have also contributed significantly to the economic growth.

Despite this impressive growth, there has been no significant impact on poverty reduction. This is probably due to the fact that the agricultural sector, where the majority of Tanzania’s population is employed (66.9 percent in 2014), did not record high growth for the last decade, compared to other sectors, which employ only a small proportion of the population. Efforts to address these economic challenges and achieve the development goals of Vision 2025 are undermined by high fertility. Tanzania’s fertility is estimated at 5.2 children per woman, with 44% of the total population below 15 years. This high fertility has provoked a huge child dependency burden which limits the capacity of families and government to save for human capital development and investment in economic infrastructure.

Notwithstanding these economic challenges, Tanzania has an opportunity to change the course of its development by strategically investing in its youthful population to drive massive socioeconomic transformation. The country particularly needs to make investments that will accelerate rapid fertility decline. This will change the current age structure dominated by dependent children to one dominated by working-age adults. The accelerated economic growth resulting from this shift in the age structure of the population is referred to as the demographic dividend. The magnitude of the demographic dividend can be enhanced by concurrent and sustained investment in human capital development, economic reforms, job creation and good governance.

This policy brief highlights key policy and programme options that will help Tanzania address the existing economic challenges in order to enhance economic productivity and job creation. It is derived from a study carried out to assess the potential demographic dividend that the country can earn under various policy scenarios. The results show that Tanzania’s GDP per capita will increase from US$ 967 in 2015 to US$ 11,656.6 by 2055 if the government prioritizes interventions in family planning, education and economic growth.2 It is estimated that US$ 3,877 of the expected GDP per capital in 2055 will constitute the demographic dividend.

Economic status Tanzania is one of the few resource-intensive African economies that have remained resilient in the face of volatile global conditions. The economy has experienced remarkable growth over the past decade, with GDP per capita increasing from US$ 12.2 billion in 2005 to US$44.9 billion in 2015.3 The GDP per capita also increased from US$ 304.3 in 2001 to US$ 979.1 in 2016.4 The services sector contributes the greatest share to GDP at 49.0%, followed

by Industry and construction (23.9 %) and lastly agriculture and fishing (21.0 %) (Figure 1). Productivity levels in the agricultural sector remain low. This is largely due to the reliance on rainfall and the use of traditional agricultural methods. Low productivity in agriculture also partly accounts for the migration of youth from rural to urban areas. As growth and productivity in the agricultural sector declines, the contribution of the other sectors to GDP is expected to increase. The manufacturing sub-sector’s contribution to GDP has remained around 7.5% since 2010, while the construction sub-sector contribution increased from 7.8% to 11.4% over the same period.5 Tanzania’s vision 2025 aims to have the manufacturing sector contribute at least 40% of GDP by 2025.

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World Bank. 2017. Tanzania economic update: money within reach - extending financial inclusion in Tanzania. Tanzania economic update; no. 9. Washington, D.C. : World Bank Group.

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Pathfinder-Tanzania, UDSM, AFIDEP, 2017. Prospects and challenges of harnessing demographic dividend in Tanzania.

Dar es Salaam, Tanzania World Economic Forum. (2016). The Global Competitiveness Report 2016–2017. World Economic Forum. Geneva. http://doi. org/92-95044-35-5

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World Bank, 2017. World Development indicators https://data.worldbank.org/indicator/NY.GDP.PCAP. CD?locations=TZ National Bureau of Statistics. (2017). Highlights for the First Quarter ( January – March ) Gross Domestic Product , 2017. Dar es Salaam

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Figure 1: Share of GDP by Economic Activity (2007 Prices), Tanzanian (2010-2016)

Source: National Bureau of Statistics (Tanzania), 2017 Economic growth is buoyed by political stability since independence, and the recent steps by the president to eradicate corruption, which has provided reassurance to foreign investors. The robust economic growth is expected to continue into the next decade (averaging at 6.2% between 2017 and 2026) underpinned by heavy infrastructure investment into rail, port and road, and a strengthening consumer base.6 There is a concern however that the frequent changes in economic policies (introduction of 18% tourism VAT, a 1% of value clearing fee for all minerals being exported out of the country, the new Petroleum Act 2015, among others) could cause uncertainty for the private sector, thus dampening their investment decisions, with negative implications for future growth.

Economic challenges Although the country has experienced robust economic growth, development challenges still abound, including high poverty levels and income inequality, unemployment, inadequate labour market skills and poor economic infrastructure.

The global competitiveness index ranks Tanzania at 113 out of 137 countries, with a score of 3.7.7 Although it improved four places from 2015, the country’s economy is still not competitive, with access to finance and high tax rates being identified as the most problematic factors for doing business. This is corroborated by the World Bank report on the ease of doing business which ranks the country at 132 out of 190 countries.8

Poverty status Tanzania’s economic growth has been less inclusive compared to other countries that have achieved similar growth rates in the sub-region. Poverty levels have only declined marginally, with the poverty headcount index declining from 35.7% in 2001 to 33.6% in 2007 and to 28.2% of the population in 2012.9 The multidimensional poverty index (MPI), an aggregate of health, education and living standards indices, shows an even higher level of poverty (64%) in the country (Figure 2). The multidimensional child poverty indicator shows that children are disproportionally affected by poverty. According to the 2016 report, 74% of children in Tanzania are deprived, with school-age children (5-17 years) being mostly affected compared to children below 5 years. Looking at income poverty, 29% of children live in poverty, while slightly more than one quarter (26%) of children below 17 years are both deprived and live in income-poor households.10 The dimensions of deprivation assessed in this report were the quality of nutrition, health, protection, education, information, sanitation, water and housing. Income inequality declined slightly, with the Gini Coefficient declining from 0.403 in 2007 to 0.378 in 2014/15.11 Similarly, Tanzania scored 0.531 in the UNDP’s 2015 Human Development Index (HDI) - an aggregate of life expectancy, education and income indices, up from 0.391 in 2000.12 This score placed the country in the bottom quartile of countries with the lowest level of human development.

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Deloitte, 2017. Tanzania Economic Outlook 2017: Joining the dots. https://www2.deloitte.com/content/dam/Deloitte/ tz/Documents/tax/tz-budget-economic-outook-2017.pdf 7 World Economic Forum. (2017). The Global Competitiveness Report 2017–2018. World Economic Forum, Geneva, Switzerland.

8 World Bank. (2017). Doing Business 2017: Equal Opportunity for All. Washington, DC: World Bank. DOI: 10.1596/978-14648-0948-4. License: Creative Commons Attribution CC BY 3.0 IGO. 9 World Bank, 2015. Tanzania Mainland Poverty Assessment. http://www.worldbank.org/content/dam/Worldbank/ document/Africa/Tanzania/Report/tanzania-poverty-assessment-05.2015.pdf 10 National Bureau of Statistics (NBS) and United Nations Children’s Fund (UNICEF). 2016. Child Poverty in Tanzania: June 2016. Dar es Salaam: NBS and UNICEF 11 UNDP & URT. (2015). Tanzania Human Development Report 2014: Economic Transformation for Human Development. Dar es Salaam. Retrieved from http://www.thdr.or.tz/docs/THDR2014-English.pdf 12 UNDP, 2016. Human Development Report 2016

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Figure 2: Poverty status in Tanzania

Source: Tanzanian Human Development Report, 2014

Unemployment Tanzania’s economic growth has not resulted in significant job creation, and unemployment remains a major economic challenge in the country. The unemployment rate is estimated at 10.3%, only a slight decline from 11.7% in 2006.

The rate of unemployment is particularly high among youth and women (Figure 3), with 60% of the unemployed being youth (15-35 years).13 About 12.3% of women were unemployed, compared to 8.2% of men. The agricultural sector accounts for the highest share of total employment (66.3%). However, due to low productivity as a result of reliance on rainfall and traditional farming methods, most of the employed population in this sector are poor. The 2014 integrated labour force survey (ILFS) showed that 83.4% of all employed persons are vulnerable employees, with women more affected (88.9%) compared to men (78.2%). In addition, about one fifth (21.7%) of the employed population are in informal employment, with limited access to business start-up capital given as the reason for the high informal employment.

Even among the employed, a significant proportion is underemployed due to the seasonal and weather patterns, and this increased between 2006 and 2014 from 7.8% to 11.8%. Again, young people (15-24) face high under-employment rates, at 14% in 2014. Shortage of skilled labour, particularly in new and fast-growing sectors of the economy partially explains unemployment among young people, and this is coupled with a language barrier, where many graduates are not able to express themselves in English. One of the challenges in job creation is lack of financial inclusion, and although low-cost mobile money transfer system has significantly increased the financial inclusion from 11% in 2006 to over 60% in 2014, most people cannot access the larger formal financial system due to high-interest rates and very restricted credit access.14 Another challenge is gender inequality in the labour market. The World Economic forum gender report shows that Tanzania has closed 80% of the estimated earned income gender gap, ranking 7th in subSaharan Africa, and 53 globally with a score of 0.716.15 However, the ILFS showed that the share of males in senior and middle management occupations is four times (82.6%) that of females (17.4%). This implies that the country has a long way to go in addressing gender gaps in the labour force. As fertility declines, there will be more new entrants into the labour market which is expected to exacerbate the current situation. There is, therefore, the need for greater attention from government and other stakeholders to expand economic productivity to absorb the growing workingage population. The challenge is to increase growth rates to achieve higher levels of poverty reduction and the creation of a sufficient number of productive jobs to absorb new entrants to the labour market.

13 National Bureau of Statistics. (2015). Integrated Labour Force Survey 2014. Dar es Salaam.

14 World Bank, 2017. Tanzania economic update.

15 World Economic Forum. (2016b). The Global Gender Gap Report 2016. Retrieved from Geneva, Switzerland: http://www3. weforum.org/docs/GGGR16/WEF_Global_Gender_Gap_Report_2016.pdf

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State of infrastructure One of the key goals of Vision 2025 is to ensure an adequate level of physical infrastructure. This is however far from being achieved. Tanzania is faced with inadequate and unreliable power supply and a weak infrastructural base. It is reported that only 23% of households and 55.6% of the population has access to electricity and to an improved source of water in 2014. The condition of roads especially in rural areas is poor which could constrain the development of agricultural and mining interests. The country has the lowest road density in the East Africa region (only 103 m/km²), and only 7.4 m/km² are paved roads. It is estimated that only 28% of the rural population lives within 2 km of an all-weather road. Poor transport infrastructure and intermittent electricity supply are major constraints to growth of the private sector and infusion of direct foreign investment. The established gas resources are expected to increase electricity generation thus easing the cost of doing business for the private sector.

Figure 3: Unemployment rate of persons 15+ years by age group and Sex

Source: Integrated Labour Force Survey (Tanzania), 2014 Women and youth, in particular, would benefit from increased financial literacy to the underserved population subgroups including the poor and those in remote rural areas.

The Tanzanian Government is however heavily reliant on foreign assistance for budgetary support. The agricultural sector recorded a growth of 2.1% in 2016 compared to 7.8% for manufacturing.

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Key policy options for accelerated economic growth and job creation For Tanzania to achieve inclusive development, it needs to implement economic growth policies that go hand in hand with job creation, income growth and social inclusion. The country should: 1. Increase investment in economic infrastructure, particularly electrification, rural roads, and urban public transport, as well as address emerging challenges of urbanization.

2. Create conducive environment and incentives for the growth of the private sector and to attract foreign direct investment (FDI) and local investment, including human capital development to make the labour markets flexible and attractive to investors. Reforms are required to unlock Tanzania’s private sector growth potential. Such reforms include policy predictability, expanding access to affordable finance, streamlining taxes and regulations, expanding access to reliable infrastructure (such as power supply and good road and railway networks), and improving the education and training system to produce skilled workers to promote industrialization 3. Modernize agriculture to increase productivity and enhance value addition since a majority of Tanzanians are still working in the agricultural sector.

4. Invest in rural roads, improve market infrastructure for agricultural produce, and develop rural financial institutions for the acceleration of rural development and reduction of poverty in rural areas.

5. Prioritize science, innovation and technology and empower youth to be agents of socio-economic change.

6. Reduce the informal sector/formalize the informal sector so that participants in this, especially women and youth, benefit from formal services, e.g. credit from financial institutions.

7. Put in place policies that will promote inclusive and pro-poor growth (by targeting sectors with high employment multiplier effects e.g. agro-processing and tourism).

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