The Small Medium Enterprises Sector In Tanzania Economics Essay

Introduction

This chapter describes the research setting. It is designed to give some useful background information about Tanzania, the country in which the study was conducted. The chapter begins by first providing general overview of geographical and economic features of Tanzania. Secondly, the chapter presents the historical overview of the entrepreneurship development in Tanzania. This is followed by the description of the SME sector and its role in economic development. Next in the chapter is a brief explanation of the organisations which support SME sector in Tanzania; this is followed with a presentation of an overview of manufacturing industry in Tanzania. Thereafter, the chapter provides an overview of the furniture sector and its role in employment and income generation. Finally, the chapter provides a brief overview of the four regions involved in this study.

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The country

The United Republic of Tanzania was formed in 1964 following the union of Tanganyika (mainland) and Zanzibar (island). The country is located in the eastern side of the Africa continent liying between longitudes 29 and 40 degrees east and latitudes 1 and 11 degrees south. The country shares borders with eight countries, that is, Kenya and Uganda to the north; Rwanda and Burundi to the west; Zambia, Mozambique and Malawi to the south and Democratic republic of Congo to the north-west. Tanzania is the largest country in East Africa with a surface area of 945,000 square kilometres with a population of about 34 million people as per the 2002 national population census. The population distribution shows that about 77% of the total population lives in the rural areas while only 23% lives in the urban areas. The country has 26 regions of which 21 are from Tanzania mainland and 5 from the island of Zanzibar. Tanzania is blessed with various natural resources which include minerals, three great lakes (Victoria, Nyasa, Tanganyika), wildlife and other tourist attractions such as national parks (e.g. Serengeti, Ngorongoro, Manyara, Mikumi), mountains (e.g. Mt. Kilimanjaro, Mt. Meru, Uluguru and Udizungwa), craters (e.g. Ngorongoro) and the like.

Economy

Tanzania is still regarded as a developing country, with 36 percent of its population living below the poverty line (ITU 2004). The country’s economy is mainly based on agricultural sector, and it is estimated that 74% of Tanzanian people engages in agricultural sector. This sector is dominated by smallholder farmers which produce both food and cash crops and the majority of these farmers live in the rural areas. Accordingly, it is estimated that a large proportion (75%) of the export commodities come from agricultural sector (URT 2007) and as such agriculture is the highest foreign exchange earner. The major export crops include tobacco, sisal, cotton, tea, coffee and spices. Regarding the GDP growth, the statistics shows that Tanzanian GDP has been increasing from 7.1% in 2007 to 7.4% in 2008. Furthermore, the statistics from the Tanzania National Bureau of Statistics shows that three sectors namely agricultural, service and manufacturing have been the major source of the GDP growth in 2008 (see Table 1).

Table 1: Contribution to GDP by Sectors – 2008

Sector

% Contribution to GDP

Agriculture, forestry and Hunting

Service

47.7

Manufacturing

22.9

Fishing

1.3

Culture

In Tanzania, there are over 120 different indigenous ethnic groups. Some of these have up to a few million people, whereas many others comprise smaller numbers of members (Olomi 2001). For example, Asians and Arabs constitute about 1% of the total population. In order to discourage ethnic sentiments, which seemed to loom large, the government instituted several measures, the most effective of which is the adoption and development of Kiswahili as the first official language and medium of instruction in primary schools. Additionally, in 1990’s there has been an increase in ethnic integration through inter-ethnic marriages. Despite these measures, ethnic groups continue to maintain distinct subs-cultures and group identities, meaning that there is a very big cultural diversity in the country. For example, ethnic sentiments can be still maintained in Asians and Arab people. Furthermore, the dominant religions are Christianity and Islam, each of which comprises about a third of the population while Atheists, Hindu and other small religious groups account for the remaining percentage of the population.

The cultural symbol in Tanzania encourages conformist behaviour whereby respect for seniority and authority is strictly observed. In fact, children are inculcated with conformist ideal right early childhood through to school going age. They are always trained to obey and respect people who are older than themselves. In fact children are constantly reminded that their success in almost anything can only be a product of this type of behaviour (Nchimbi 2002). Additionally, most of the African countries and Tanzania in particular have been known for pinning down every success or failure on the work God. As a result, most of the people would use this anecdote as a convenient excuse of taking full responsibility for their actions.

As for the entrepreneurship culture, this is the aspect which is generally under-developed in Tanzania (Olomi 2001). This can largely be attributed to historical and political reasons associated with colonialism and socialism respectively. For example, during the colonial era there were deliberate efforts in restricting the participation of indigenous Africans in business activities. In fact, the participation of indigenous Africans in business was limited to ownership of very small enterprises such as tiny shops whereas Arabs were allowed to operate as retailers only, and Asians as medium wholesalers and retailers (Rugumamu and Mutagwaba 1999). Nevertheless, the business community of the Asian origin is still most entrepreneurial active and successful in Tanzania (Finseth 1998). With regards to indigenous people, it is the Chaga people from Kilimanjaro region who are significantly overrepresented in the entrepreneurial arena across the country.

SME sector in Tanzania

As briefly discussed in Chapter One, the SME sector is an outcome of the structural adjustment policy rather than of a design. It is amongst the products of the failure of African socialism which led to the economic crisis of the 1970s and the early 1980s. Within this political framework, private business sector was actively discouraged in favour of public enterprises which were government owned, community based, or cooperative owned ventures. Accordingly, the regulation was introduced to restrict civil servants and leaders of the ruling party from engaging in business activities. Since almost all educated people were members of the civil service then it is obvious then that business activities were left to people who had no education at all. Further, this African socialism policy was based on the top down approach in decision making and in fact the Government was the only organ which made all the decisions for its citizen, including on such maters as who should go to which school or college, who should work where one should work and live, how much one should earn in terms of wages etc. The reliance on Government discretion in decision making decisions has resulted into a culture of dependency on government and unquestioning obedience among most Tanzanian people. In fact this approach have contributed to the stifling of development of entrepreneurial values such as the need for achievement, personal initiatives and or creativity, willingness to take risks and related behaviours (Olomi 2001). The socialism approach recorded marked achievement in social development in the 1970s and early 1980’s especially in primary education, health services delivery as well as water supply and sanitation (Temu and Due 2000). However, the nationalisation of the private sector led to poor economy marked by a number of macro-economic imbalances, and consequently an economic crisis that lasted for over a decade (Kanaan 2000). This crisis has also led to the erosion of real purchasing power among the salaried people. Thus Tanzanian people were forced to establish small business augment their meagre incomes. For instance, some of the people engaged themselves in dubious activities such as smuggling goods from neighbouring countries and sell them at premium prices in Tanzania. These kinds of businesses were against the government’s policies that considered such businesses as being in conflict with the country’s ideology (Maliyamkono and Bagachwa 1990).

Succumbing to pressure from the World Bank, Tanzanian Government changed its policy from state led economy to a market driven economy. In fact, the final reform took place in 1991 leading to privatisation of most public enterprises as a result. The privatisation of state enterprises and the disengagement of the government from some activities resulted into the retrenchment of workers from the public sector and, as a result, most of these workers turned to micro enterprises for survival. In light of the above experience, the SME sector has recently become a very significant agenda in the Tanzanian economy. Indeed, it is well accepted that the SMEs sector has an important role to play in income and employment generation. Having explained the development of SME sector in Tanzania, the section below defines SME according to Tanzanian definition, this is followed with a review of the current status and problems of SMEs in Tanzania.

Definition of SME

There is no universally accepted definition of SME. Different countries define SME differently depending on their level of development. However, the commonly used criteria in the definition include the total number of employees, the total investment and sales turnover. Thus, the Tanzanian Government defines SMEs according to sector, employment size, and capital invested in machinery. Accordingly, in the context of Tanzania SMEs are defined as micro, small and medium size enterprises in non farm activities which include manufacturing, mining, commerce and services. A micro enterprise is defined as a firm with fewer than five employees whereas a small firm is a firm with 5 to 49 employees, a medium enterprises is a firm with 50 to 99 employees. Any firm with 100 employees or more is regarded as a large enterprise (see Table 2) below for detailed demonstration). In the case where an enterprise falls under more than one category then the level of investment would be the deciding factor.

Table 2

Current Status of SME sector in Tanzania

Despite the importance of the SME sector in economic development, it is difficult to get recent and reliable data regarding the current status of SME sector in Tanzania. From the expert interviews conducted by the researcher in the current study, it has been discovered that SME sector is dominated by micro and small enterprises despite that the available data to support this observation are rather sketchy and unreliable. Additionally, it is estimated that there are approximately 2.7 million enterprises in the country, out of which about 60% are located in the urban areas. The majority (98%) of these are micro enterprises (employing less than five people). Therefore, medium and large enterprises in the economy are extremely few. Most (66%) of the micro and small enterprises have an annual turnover of less than US $2,000 and have been established as a survival strategy. Moreover, the estimates show that there are about 700,000 new entrants into the labour force every year. About 500,000 of these are school leavers with few marketing and entrepreneurial skills. The public sector employs only about 40,000 of the new entrants into the labour market, leaving about 660,000 to join the unemployed or the underemployed army reserve. Most of these people end up in the SME sector, and especially in the informal sector. The survival rate of these emerging SMEs is also low; over 60% survive only the first five years of operation. Although SMEs are found in all sectors of the economy, they are dominant in trade (54%) followed by services (34%) (URT 2003). This is because the SME sectors as identified above require minimum capital and requirement for some one to start a business of this kind.

Problems faced by SME in Tanzania

Despite its contributions to income and employment creation, generally SMEs in Tanzania are currently faced with a lot of problems (Bagachwa, Harris, and Tinios 1993; (Verspreet and Berlange 1998; (Calcopietro and Massawe 1999; Ziorklui 2001; .

In determining barriers to SMEs growth, rural program on Enterprise Development (RPED) surveys found two levels of constraints facing SMEs in Tanzania: those acting as barriers to general operations and those impeding growth. The report concludes with a list of factors impeding the development of SMEs as follows,

Lack of access to credit,

Low education level of entrepreneurs,

The lack of managerial, marketing and production skills, and

Regulatory constraints stemming from the difficulty of obtaining legal status.

(Calcopietro and Massawe 1999) classify the factors hindering SMEs development in Tanzania into five categories namely; macro-economic and policy environment, physical and technological infrastructure, the banking and finance structure, legal and regulatory framework, and market conditions. This undesirable situation has persisted for a long time despite the existence of various programs aimed at developing SME sector. As (Olomi 2006) notes, institutions and associations supporting SMEs are weak; their services are quite basic and mainly focus on helping the poor to survive. As a result, there are variations in performance among SME; whereas some are growing others have permanently remained micro or informal without any marked growth. In Africa, this phenomenon is referred to as the “missing middle” and continues to be a long-term concern for African policy makers (Kibera and Kibera 1997).

Organizations supporting SME in Tanzania

Due to the recognition of the importance of SME to the country’s economy, Tanzania Government has continued to design several programmes and institutions which aimed at supporting the development of SME sector, these include-

Small Industries Development Organisation (SIDO).

This was established in 1973 by the Act of Parliament to plan, coordinate, promote and offer every form of service to small industries. This is a main government arm for promoting SMEs in Tanzania. Some of the things SIDO have achieved include:

Establishment of 10 training-cum-production centres that offer simple rural based technologies;

Introduction of hire purchase programs through which more than 2000 entrepreneurs were assisted with machines and working tools;

Setting up of regional extension services offices that render advice on setting up of new industries, choice of technology, preparation of feasibility studies, preparation of economic surveys, installation, operation of machinery, maintenance and marketing of products; and

Conducting training programme in Management, Financial and Marketing skills.

Currently, SIDO is focused much on conducting training programmes; however, since the SME baseline survey which was conducted in 1991; there has never been any other survey SIDO to date. This is attributed to lack of funds for the researcher to conduct the survey study in all the regions.

Despite the achievements and weakness mentioned above, SIDO in collaboration with other stakeholders have continued to support the establishment of SME associations to empower individuals in the private sector. Some of these associations include Tanzania Food Processors Association (TAFOPA), and Tanzania Small Industries Organisation (TASISO). These associations have been useful in involving the members in all issues related to accessibility to markets, information flow, raw material, packaging and micro credit services. However, these organisations are mainly located in Dar es Salaam, which makes it impossible for the entrepreneurs in the upcountry to benefit from the services rendered by these associations, such as access to information.

Ministry of Industry, Trade and Marketing

Recently, the Ministry of Industry and Trade established the SMEs Department; this department focuses on promoting the growth of SMEs in Tanzania. This department is in its infant stage, so it is still gathering information about SME. The main goal for this move is to have a centre for database for SME and other duties which would be commissioned by the Government. Thus, no data were found in this department.

Private organisations

Apart from organisations mentioned above, institutions in the private sector such as Tanzania Chamber of Commerce Industry and Agriculture (TCCIA) and Confederation of Tanzanian Industry (CTI) are also supporting SME development. These institutions are actively encouraging, promoting membership, and ensuring that the organisations are adequately financed through member fees and donor-sponsored programmes aimed at strengthened the private sector. For instance, there is an office at the CTI which deals with SMEs problems and services. In this regard in 1999, CTI conducted a study with the aim of identifying major problems and concerns of SME in Tanzania. Twenty-seven major constraints were listed by SMEs and to date some of the constraints have been addressed. . However, the outreach CTI services are still limited because having Dar es Salaam as their center of attention.

University of Dar es Salaam Entrepreneurship centre (UDEC)

The Faculty of Commerce of the University of Dar es Salaam established UDEC in 2001. The Centre provides consultancy and training in SME related issues. Currently, the centre has established the incubator whereby graduate entrepreneurs and other managers/owner of businesses can be trained on entrepreneurship and related issues. Moreover, UDEC in collaboration with Business in Development Network Foundation (BiDNF) of the Netherlands and other local partners launched a business plan competition on 11th April 2007. The initiative aimed at stimulating Tanzanian of all occupations to identify and develop creative ideas which have some impact on development. These Tanzanians are supported in developing bankable business plans and being linked with local and international financiers. The best 25 business planners would be linked to business professionals for the purposes of improving these plans to the level of sustainable enterprise ideas.

Government/donor joint efforts

Joint Government and donors support institutions have been established also to support enterprise development in Tanzania. During expert interviews the current research visited various institutions as explained below.

MKURABITA

This program dwells with Tanzania’s property and business formalization, which is popularly known by its Kiswahili acronym MKURABITA. This programme helps people who want to formalise their property or business, to do so. The main purpose of the programme is to empower the majority in the informal sector so that they can make better use of their property and business assets and take advantage of other opportunities in the modern market economy. The idea behind this initiative is that many poor people do actually possess wealth in the form of land and small businesses, but because they have no title deeds to their land, or because they operate unregistered business, they either have little access to capital or are unable to expand their economic activities beyond their own local areas. If these businesses or assets are formalised, it would be easier for them to secure loans from financial institutions. Currently, a small Programme Management Unit under the President’s Office manages MKURABITA.

Business Environment Strengthening in Tanzania (BEST)

This programme aims at strengthening the business environment in Tanzania by firstly, reducing the burden on businesses through removing regulatory and administrative constraints, and secondly through improving quality of the services provided by the Government to the private sector, including commercial dispute resolutions. As noted earlier, private sector in Tanzania has been earmarked as the engine for economic growth therefore strengthening business environment is among the priority areas in Tanzania. Among the key enabling factors to a strengthened business environment is good regulatory environment. The BEST Programme is therefore instrumental in achieving this objective, and is designed to provide businesses with the enabling environment they need, and thereby enhancing economic growth and achieving rapid poverty reduction

In summary, several organisations support SME development though they are poorly co-ordinated and lack the necessary coverage to reach all the sectors of the small business community. This is because most of these organisations have their attention focused to (and are located in) Dar es Salaam. Additionally, most of the projects funded by donors (e.g. BEST and MKURABITA) are more focusing on legal and regulatory framework and overlooking the fact that there are other factors surrounding the existence of SMEs, which need more attention as well. Nevertheless, it is obvious that since the Government took the initiatives of developing the private sector, the sector has grown in terms of number of businesses established, capital and employees. SMEs have contributed considerably to the growing GDP and in creating employment opportunities to the Tanzania people. However, there is no recent comprehensive information on the performance of SMEs in Tanzania. The survey study done by Wangwe in 1999 summarizes the contributions of SME to Tanzanian economy as follows:

That they are estimated to contribute 30-35% of the gross domestic product (GDP)

They create jobs for 20% to 30% of the total labour force.

They temporarily mobilize unused resources such as land, capital, labour and management skills that would have remained idle.

The sector is an important source of income for those whose real wages and salaries are falling in the formal sector.

The sector has become the largest urban job provider and shows the highest employment growth rates which is estimated at 10% per year.

The recent available information is from the 2004 Investment Climate Assessment, which was based on the firm’s level survey data covering about 480 firms, 276 from the manufacturing sector in the woodworks, furniture, textile and garments, leather, construction materials, paper and publishing, chemicals and paint, plastics and agribusiness sub-sector. The study reveals that SMEs sector is growing fast in recent years as compared to the rate of growth in the early 1990’s.

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An overview of manufacturing industry

Manufacturing industry in Tanzania consists of a number of activities as seen in Table 3. Most of these sectors deal with production of goods and services that are used as end products or as inputs in other production processes. This sector has a very important role in Tanzania’s economy. Although the data to support this observation are not up to date but the statistics taken in 2000 suggests that about 48% of the total monthly wage earners are employed in this sector. Accordingly, this sector remains among the major contributor of the Tanzanian GDP, as we have seen in table 1 that the sector is currently the third most important to the Tanzanian economy. Further, its contribution to GDP increased from 9% in 2006 to 9.2% in 2007 (URT 2007). Despite its importance to the country’s economy, manufacturing activities in Tanzania are relatively small with most activities concentrating on manufacture of simple consumer goods such as food, beverages, tobacco, textiles, furniture, and wood related products. Business survey in Tanzania mainland done by Tanzania national bureau of statistics reveals that three sectors (textiles, food products and beverages, furniture and manufacturing) have the highest proportions of business activities as seen in table below.

Table 3 Number and Percentage Distribution of Businesses in Manufacturing Industry by Activity, Tanzania Mainland

Activity

Business

Number

Percentage

Wearing Apparel; Dressing and Dyeing of Fur

6,584

42.1

Food Products and Beverage

4,728

30.3

Furniture; Manufacturing

2,905

18.6

Fabricated Metal Products, Except Mach. & Equip

733

4.7

Wood and of Products of Wood and Cork, Except Furniture; Manufacture of Articles of Straw and Plaiting Materials

246

1.6

Other Non-Metallic Mineral Products

238

1.5

Publishing, Printing Recorded Media

134

0.9

Textiles

0.2

Chemicals and Chemical Products

0.1

Rubber and Plastic Products

0.0

Tanning and Dressing of Leather;Luggage, Handbags, Saddlery,Harness and Footwear

0.0

Tobacco Products

0.0

Paper and Paper Products

0.0

Recycling

0.0

Total

15,625

100

Source: Business Survey 2007, National Bureau of Statistics

Furniture industry

The furniture industry is part of the manufacturing industry mainly for processing and semi processing of the forest products. Therefore, the forest sector mainly acts as a source of raw materials used in wood and wood products industries all over the country. Furniture industry in Tanzania has also changed hands several times in the last century. For instance, during socialism era most of the furniture industries were under public ownership and were owned by the state. Again, due to the failure of the African socialism era in the late 1990s, most of the nationalised industries collapsed. Responding to this, the Government then began privatisation of state enterprise including furniture industries. To date, most of furniture industries in Tanzania are small scale enterprises maintaining low levels of production aimed at serving local markets (Nchimbi 2002). Further, majority of these small scale enterprises have few permanent employees and little working capital beyond working tools and small premises (Kristiansen et al. 2005). For instance it is estimated that only 3% of the total permanent employees are employed in this sector. Also, most of these firms are located in the urban areas and only few can be found in the rural areas. Additionally, most of these firms are run by entrepreneurs who have low levels of education, and who rely on simple hand tools to make furniture. Despite these limitations, small manufacturers in Tanzania are very creative and they manufacture furniture of various designs, and which have been regarded as premium commodities in foreign catalogues (Murphy 2006). This sector is among the significant contributors to the manufacturing gross domestic product (GDP) and employs about 17 percent of the total workforce in manufacturing sector (URT 2008) Furthermore, this sector is not very import-dependent because most of the raw materials used are locally available in Tanzanian forests (Harding, Söderbom, and Teal 2002). For this reason, it is obvious that the sector is demand driven and provides employment to other sectors such as forestry.

Study regions

This study was conducted in four regions namely Dar es Salaam, Arusha, Morogoro and Iringa. These regions are briefly described below.

Dar es Salaam

Dar es Salaam city is found in Dar es Salaam region is comprises three districts: Ilala, Temeke and Kinondoni. Dar es Salaam is the largest commercial city of Tanzania. This city is located in a quiet bay off the coast of the Indian Ocean, and in which more than 3 million people live.. The city is favoured for having much of the economic infrastructure and almost all ministry office headquarters are located in this city. Being the prominent region, Dar es Salaam is likely to be a place where various business matters are serious undertaken. For instance, it is documented that high concentration of economic and social activities, skilled labour and capital are likely to be found in this region (Ishengoma 2005). Major economic activities carried out in this city are manufacturing, trade, financial services, education and training, transportation and construction (URT 2008). Furthermore, skilled workers are likely to locate themselves in Dar es Salaam where it is relatively easier for them to secure jobs (Ishengoma 2005). Accordingly, compared to other regions, Dar es Salaam has high household monthly expenditure and thus the region is a large market for consumer goods. Based on these qualities, the city has also attracted many manufacturing firms including furniture manufacturing.

Arusha

Arusha town is found in Arusha region, which is in northern Tanzania, and lies at the foot of mount Meru. This town is surrounded by most famous national parks and landscapes. The town, which is also the administrative centre of Arusha region and East African Community, has an estimated population of 1,288,088 people (2002 census). It is a fast growing town, which is conveniently linked to Dar es Salaam, Moshi, and Nairobi by road, train and air services. In fact this town is regarded as second to Dar es Salaam in terms of volume of commercial activities. The town enjoys the best climate in the country with most months being cool. Arusha region has a vibrant and growing economy. The town is a gateway to the most popular tourist attractions in the country, such as Serengeti, Lake Manyara, Ngorongoro national parks as well as Mount Kilimanjaro. Generally, Arusha as a region generates substantial revenue from minerals (especially Tanzanite), cash crops (coffee) and food crops (maize, wheat, beans and vegetables). The region is made of four districts: Arusha, Arumeru, Kiteto, Mbulu and Hanang.

Iringa

Iringa is the region located in the southern highlands of Tanzania about 700 kilometres from Dar es Salaam. The town, which is also the administrative centre of Iringa region, has an estimated population of 112,900 (2004 urban census). This city is a pleasant small town which is famous for agricultural production especially maize, vegetables, fruits and timber. The region is made of five districts which include Iringa town, Makete, Mufindi, Kilolo and Njombe.

Morogoro

Morogoro is the region located in the southern highlands of Tanzania 192 km west of Dar es Salaam. The region lies at the base of Mount Uluguru with a population of 206,800 (2002 census). During African socialism era the region was commonly known as industrial region because most of the industries were located in this region. To date, most of these industries are privatised and owned by individual people. The region is comprised of four districts namely Kilosa, Mvomero, Ulanga, Morogoro town, ulanga and Kilombero. Morogoro is a region connecting to Dar es Salaam, the country’s capital cit

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