From the bottom up: Firm capabilities and the ‘in-between’ sector in Tanzania

  • Recent employment growth and an increase in labour productivity in Tanzania has been driven by the non-farm MSME sector.
  • By using newly released data, like the first MSME Survey conducted in Tanzania, this project found the bulk of productivity growth in the MSME sector can be attributed to a select few firms – the so-called ‘in-between’ sector.
  • These findings have a bearing on how the government makes policy to boost labour productivity.
  • Based on these findings, the researcher has worked with Tanzania’s Small Industries Development Organization (SIDO) and National Microfinance Bank to design and pilot financial products to help these in-between firms grow further.

In Tanzania, the bulk of the 88.6% employment growth between 2002-2016 has been in the largely informal private sector comprised of non-agricultural Micro, Small, and Medium Enterprises (MSMEs). Along with this shift to more employment in non-farm MSMEs, labour productivity in Tanzania has grown more rapidly over the past 14 years than at any other time in recent history, at roughly 4% per annum. This study looked at the relationship between MSMEs, labour productivity, and economic growth.

Firstly, and perhaps unsurprisingly, the study found that the shift in employment nationally towards the MSME sector has been a key factor in the increase in labour productivity. More importantly though, this study finds it is a small subset of firms within the MSME sector that has contributed to the bulk of this increase. By using newly released data sets, including the first National MSME Survey conducted in Tanzania, the study finds that this subset of highly productive firms shares a set of common characteristics such as: i) owners that would not leave their job for a full-time position salaried position working elsewhere and ii) written accounts.

This fact matters because it has a bearing on where the Tanzanian government and its partners should invest resources if they want to boost overall productivity in the non-farm MSME sector. What these findings suggest is that the government should focus on making this ‘in-between sector’ of highly productive MSMEs grow further, rather than apply broad-based interventions to the whole sector. Accelerating employment growth in this group of firms has the potential to contribute 1.2 percentage points to annual labour productivity growth; to put this in perspective the formal modern sector contributed 1.58 percentage points to annual labour productivity growth over the ten years preceding this study.

Building on the potential of the productive in-between sector requires financial products and business services targeted at this group of firms – and this is exactly what researchers are now working on. Margaret Macmillian has now finished a project working with Tanzania’s Small Industries Development Organization (SIDO) and National Microfinance Bank (NMB), Tanzania’s largest commercial bank, to design and pilot a special loan product targeted to firms that exhibit high-growth potential.

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