Tanzania’s Quest for Economic Supremacy with a Nod to Japan’s Legacy

Tanzania's Economic Strategies
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Tanzania is giving Kenya, hitherto the regional economic powerhouse, a run for its money. With the country under a new, liberal political leadership, Dar e Salaam seems to have discovered the right “is” to dot and the right “ts” to cross. In other words, Dar is dying to play with the big boys, and the good folks who run things over there are handling the “whatever it takes” quite impressively, but what are Tanzania’s Economic Strategies?

According to recent data, Tanzania’s GDP is expected to grow by 0.99% in 2024 from 5.21% this year. On the other hand, Kenya’s GDP is expected to decrease by 0.16% in 2024 from 5.44% this year. For Uganda, the GDP growth is likely to remain at the current 5.7% next year. If these statistics are anything to go by, Tanzania is on the right track.

But if Tanzania wants to dominate the East African region economically the same way Japan has dominated East Asia, there are a few lessons it needs to take from Tokyo. Recent data shows that Tanzania’s direct investment and net inflows as a share of GDP is 1.10%; Japan’s is 1.22%, while inflation of consumer prices in Tanzania is roughly 4% and -0.23% in Japan. Net inflows and direct investment are almost at par with Japan; the opposite is true regarding managing inflation.

The thing is, Japan had a deliberately ambitious plan to bounce back from the ravages of the Second World War. Even in those dark moments, it still carried the desire to become one of the leading economies in the world. The execution of this plan started by making the business environment interest-free.

By June 2008, when the last global financial crisis started to kick in, this dream was more or less a reality. Japan’s star was shining like diamonds. When Haruhiko Kuroda was appointed governor of the Bank of Japan in March 2013, a 2% inflation rate had become the ultimate target behind the country’s national economic agenda.

This policy immediately impacted the economy: it led to a massive increase in the total amount of money under circulation in the country. Between March 2013 and June 2022, the total amount of funds under circulation increased from 135 trillion yen (27% of GDP) to a staggering 673 trillion yen (124% of GDP).

Japan understood something important that most major economies have missed: sustaining a business environment that attracts lower interest rates. A business environment that enjoys low-interest rates has a higher investment demand.

Behind Japan’s Economic Curtain: Why Inflation Remains Tamed

In an ideal situation, low-interest rates usually increase purchasing power and overall demand if the resources available to the economy are fully employed. Despite increased demand and more money under circulation, prices in Japan have remained relatively low, effectively bringing inflation under control.

Similarly, Japan’s overnight call rate has been below 0.1% since March 2010 and has been slightly negative since March 2016. The call rate is the interest rate charged on the type of loan that the lender can demand at any time. With a lower call rate of just 0.1%, the opportunity cost of holding money has been zero in Japan for a long time.

The puzzle behind Japan’s low inflation can also be understood by looking at the country’s marginal productivity of capital: the difference in a company’s output when a new capital unit is used.

As the price of capital decreased relative to the cost of labor, it became profitable for Japanese companies to substitute work with money. According to most studies, the money–labor ratio increased by 12.6% in nominal and 5.6% in real terms between 2013 and 2020.

That said, Japanese net investment has been mainly driven by population growth. With Japan’s population declining recently, the corporate sector has had little incentive to expand domestic production capacities.

Ideally, the separation of monetary expansion and inflation assumes that companies face a borrowing constraint, that they cannot borrow as much money as they would like to do, for example, to the lending regulations of banks.

In the real-world case of Japan, however, the separation mainly resulted from population decline. It is difficult to argue that Japan’s corporate sector is facing borrowing constraints, given that it has been the biggest provider of financial capital since the mid-1990s.

Something unique emerges here: Given the lack of growth prospects at home, the corporate sector in Japan has been investing heavily abroad in recent years. Data shows that outward foreign direct investments surpassed domestic net assets by 70%.

Japanese companies may have invested more abroad than at home in the last two decades, but this didn’t negatively affect the Bank of Japan’s balance sheets. It has positively impacted the economy by making international trade easier.

If Tanzania’s Economic Strategies adopt some of the policies that Japan has used over the years to manage economic crises, it could seriously challenge Kenya as the favorite investment destination in the region. As for the top spot in terms of overall economic dominance, as far as the IMF is concerned, it will be a done deal in ten years. But we may have to wait and see.

Read more economic insights here.

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