25 December 2012

East Africa: Why Tanzania Fails to Utilize Extractive Industry

Dar es Salaam — Despite being the country's leading sector in export and Foreign Direct Investment (FDI) earner, Tanzania has failed to utilize the extractive industry to spur its economy as well as to create new job opportunities.

An extractive industry which involves exploitation of non-renewable natural resources like minerals like Tanzanite, gold, diamond,uranium, iron ore and, natural gas and fossil fuel, contributes less than 1% of the country's labour force.

According a paper on 'Management of the Extractive Industries', that was presented jointly by Dr Adolf Mkenda, head of department of economics from the University of Dar es Salaam and Mr Zitto Kabwe, a shadow minister for finance, the extractive industry which is one of the fastest growing sectors only contributes 1% of the country's labour force.

Presenting a paper during the post 2015 global development agenda national consultations dialogue organized by the President's Office, Planning Commission in collaboration with the University of Dar es Salaam Department of Economics, Dr Mkenda explains Tanzania fails to utilize its natural resources due to a number of factors.

According to Dr Mkenda, the country fails to exploit extractive industry due to insufficient investment in science education, unequal expertise, the Dutch disease, and volatility, living off the capital, spoliation, weak and unaccountable states.

Dr Mkenda notes that most of the developing countries lack the expertise in technology, legal and marketing skills regarding the exploitation of natural resources.

As a result, he adds, "the buyer knows more than the seller, and the seller needs the buyer just to have the product on the market." He shows that, "this gives immense bargaining power to the multinationals and thus makes it very difficult for government to extract a fair deal."

Elaborating the Dutch disease, Mkenda believes the growing foreign exchange earnings make it easier to import.

The imports compete with local manufacturing goods. The increasing labour is shifted into the natural resources sector, making it very expensive for the rest of the sectors in the economy.

"As a result two sectors benefit - extractive industry and the production of non-tradable goods while other sectors are as a result stifled (manufacturing and agriculture)," he asserts.

About volatility, Kabwe elaborates that nature of agreement between the multinationals and governments such as the provision for what is called fiscal stability clause and the inherent variation in the prices of natural resources.

Another thing according to Kabwe is the concept of living off the capital, in measuring the GDP, allowance is made for wear and tear of the stock of capital.

"Now, think, if a village idiot sells his herd of cows and his farm and spend the money eating and drinking, is the idiot's income increasing, he asks, adding "What of the government which extracts its natural resources and just spend?"

He observes that it is important to invest in education rather than reliance on extractive industry. "Look at Norway, it's not doing well because of oil, it is doing well because of investment in education, technology and science.

About spoliation, Kabwe insists since natural resources tend to be disconnected from the rest of the economy it means that misusing the resources does not inflict a direct and obvious pain to the population the way a misuse of tax money does.

"As a result, there is a negative correlation between natural resources abundance and political accountability, leading to extremely high rent seeking behavior," he said.

Elaborating the concept of weak and unaccountable state, Kabwe warns that, "You may think that natural resources bounty will strengthen the state. But this is not automatic; in fact the opposite is more likely." He insists natural resources can make government rely less on tax for revenue.

"This means that the state relies less on citizens and feel less obliged to be accountable to them," he adds.

According to him, the government may feel less need to invest in a diversified economy and pour money into oppressive apparatus. Multinationals can easily buy off the elites who control the state and thus implicitly deny citizens of their democratic rights to enforce oversight over the government.

"It is difficult for undemocratic state to properly manage natural resources. We need a transparent, democratic elected and accountable system of government of the extractive industry," he emphasises.

Kabwe says that Tanzania is rich in minerals such as tanzanite, gold, diamond, uranium and iron ore together with the massive discoveries of natural gas and fossil fuel. "The country must be able to create immense jobs," he affirms.

"In Tanzania gold exports increased by 16.5% to $2.27bn however the industry contributes less than 1% of the labour force only," Kabwe adds.

According to him, the discovery of gas and uranium reserve makes Tanzania one of the prominent players in extractive resources; however things are not as it was expected.

According to Kabwe, Tanzania has potential to reach over 60 trillion cubic feet of natural gas, because it is about nine natural gas wells which are not exploited or still undergoing exploration.

When presenting the state of the economy for 2011 in the parliament, the Minister of State, President's Office, Social Relations and Coordination, Mr. Stephen Wasira said the value of Foreign Direct Investment (FDI) increased by 97% for the year 2011.

Wasira indicated that FDI increased to $854.2m compared to 433.9m in 2010. "This increase was attributed to large investments on exploration of gas in Mtwara and Coast regions amounting to more than $300m."

"In that trend, who has been employed in these potential sectors which expected to be an economic engine drive and a suitable gun to eradicate poverty to most Tanzanians," he bemoaned.

According to Bank of Tanzania's Monthly Economic Review of September, 2012 the volume of gold exports also increased to 40.2 tonnes from 37.9 tonnes recorded during the year ending August 2011.

The central bank report shows that the value of gold exports increased by 16.5% to $2.27bn in the review period, due to an increase in world market price and export volume. The world market average price for gold was $1,662.3 per troy ounce, an increase of 17.2% from the level recorded in August 2011.

Kabwe says "Secrecy surrounding financials and taxes in the mining sector exacerbate the views expressed by the President."

Mr. January Makamba, the Chairman of the Parliamentary Committee on Energy and Minerals says, "the asymmetry of information favours these companies." Both parliamentarians agree that when it comes down to it, Tanzanians simply want to see their country get a fair share from their natural resources.

Therefore, in Makamba's view, 'the extractive industries (need to be) a little bit more integrated into the broader economy.'

Kabwe argues that this too could be improved. "Taking the proportion of the taxes companies are paying to total export of minerals, you will realize that the government receives peanut(s), around 13% only," he says.

Furthermore, Kabwe argues that most of the taxes mining companies pay do not originate from the companies but come out of employees' pay cheques.

Mr Semkae Kilonzo, Coordinator at Policy Forum, an umbrella Civil Society Organisation with a networked membership of over 100 NGOs in Tanzania, says that doubts about mining companies' contribution to the economy stem from a perceived lack of transparency.

Just like Kabwe, Kilonzo insists that the way to remove doubts about the sector is to make all payments and contracts public. "Secrecy creates public discontent and mistrust of mining companies of which populist leaders are compelled to react to." Consequently, without an open and honest dialogue, "that discontent is bound to continue," he argues.

The mining sector contributed 2.8% to Tanzania's GDP and employed about 14,000 people while Mohammed Enterprises, a local family owned company that deals with manufacturing and distribution of goods and services, reportedly contributes 3% to GDP and employs about 24,000 people.

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