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Is Magufuli’s economic nationalism working?

By Nicholas Norbrook
Posted on Thursday, 9 May 2019 19:40

President John Maguguli has a trademark ‘us against the world’ image. Daniel Hayduk/AFP

The threat of a $190bn tax bill became a $300m payment. The Africa Report looks into whether the Tanzanian government’s barnstorming style will revolutionise the economy or scare away investors.

There was a certain optimism when John Magufuli became president in 2015.

Here was a man, as the early skirmishes on social media revealed, who was not afraid to get his hands dirty to get things done: surprise visits on hospitals and government offices to reveal who was slacking off work; a push for discipline and austerity in public office; and an anti-corruption drive known as ‘lance the boils’.

Even some of his most trenchant critics – like opposition politician Zitto Kabwe – say that Magufuli is making progress. Kabwe tells The Africa Report: Magufuli is doing the “right thing, but in the wrong way”.

What is this “right thing”? At its core it concerns the role of government, the mediator between the interests of capital, on the one hand, and citizens, on the other.

“Let us stand as one. Tanzania belongs to us all and we should put the interests of the country first,” Magufuli told parliament in 2015. It is also a political fault line of the industrial era.

The US President Theodore Roosevelt at the dawn of the 20th century fought against the price-gouging cartels in big business in finance, energy and logistics, who ripped off Americans in the era of the robber barons.

“When I say that I am for the square deal, I mean not merely that I stand for fair play under the present rules of the game,” said Roosevelt in a famous speech, “but that I stand for having those rules changed so as to work for a more substantial equality of opportunity and of reward for equally good service.”

Magufuli has certainly changed the rules of the game in Tanzania.

Passed in 2017, the Natural Wealth and Resources Contracts law allows officials to trawl back through two decades’ worth of contracts to see if any of the terms are unfavourable to the government. Equinor, which has invested more than $2bn in developing Block 2 off the coast, says that the production-sharing agreement it has with the government is still valid, but has been unable to get any further in negotiations over building a $30bn gas plant in Lindi.

Other legislation pushed the royalty rate on gold from 4% to 6%, gave the government 16% of the stock of mining companies, and made it illegal to export concentrates and unprocessed minerals. This was accompanied by a major confrontation with the biggest mining company, Acacia Mining – which had revenue of $751m in 2017, is owned by Canada’s Barrick Gold and is listed on the London Stock Exchange.

In March 2017, the government halted the company’s cargoes at the port. It claimed that Acacia had been understating the value of exports to avoid tax since 2000 – something Acacia denied. The Magufuli administration then slapped a tax bill of $190bn on the company.

Loud rhetoric

“The country has been short-changed and continues to be cheated out of the much-needed revenue that would greatly boost our health sector, infrastructure and others,” Magufuli declared. In what appears like a victory for his tough stance, Barrick Gold announced that a deal had been struck – whereby it ­handed 16% of the company to the government, promised to share profits 50:50 and agreed to pay a fine of some $300m.

The coal sector has seen intervention, too. A ban on importing coal to stoke domestic mining raised howls across the private sector in 2016, especially with Dangote Cement. Owned by the continent’s richest man, the firm argued local coal was too expensive and poor quality.

But it is not just in mining. Late last year, Magufuli stepped in to support a higher price for farmers. When private buyers baulked at the price, he forced a government-controlled bank to step in: “We will buy the entire crop, then we will look for buyers, and we will eat anything that is not sold,” he said, ordering troops into the fields to protect the crop from black-market operators.

Telecoms have not escaped his attention. In 2017, Magufuli claimed that Indian company Bharti Airtel had swindled the government out of its rightful share. The presidency announced in January this year that it had upped its stake in Bharti Airtel from 40% to 49%, and that the telecoms operator would be paying the government more dividends.

So how has Magufuli executed his systemic rejig? It is a highly centralised approach – heavy on loud rhetoric, light on parliamentary or societal checks and balances. “There is rampant looting in the mining sector,” says Magufuli one day; “We are in an economic war […] billions in revenue have been lost,” he will say the next. And another: “Even the devil is laughing at us over our own self-inflicted level of poverty amid natural wealth given to us by God.” Dismissals of what he sees as corrupt or inept officials, and a rewiring of responsibility back to the presidency are also a feature.

“The wide discretionary powers of the Minister for Energy and Minerals have been removed,” wrote Stein Sundstol Eriksen in a 2018 report for the Norwegian Institute of International Affairs. The ministry of energy and minerals has certainly been a locus of corruption.

But Magufuli has also changed the dynamic in the tax-collection wing of government. Tax is the fuddy-duddy at the development party. It can be seen lurking round the edges of the room, while newer, more shiny development strategies take centre stage: Mobile money! Business environment! SMEs! Microlending! Crypto-currencies!

Drive against tax evasion

But building a solid tax base remains a core job, the tough slog of good governance. And in Tanzania, similar to African peers, the tax-to-GDP ratio base is consistently in the low teens. Magufuli has delivered here. “The tax-to-GDP ratio has increased by about 1.5% of GDP since FY2014/15, supported by President Magufuli’s drive against corruption and tax evasion,” reads the June 2017 International Monetary Fund report on Tanzania.

And at a contract-signing ceremony for the building of a new hydropower dam in the middle of Selous game reserve in December 2018, Magufuli hammered home his trademark ‘us against the world’ message. “When we asked for financing for this project, the lenders refused to give us money, but thanks to improved tax collection we are able to finance this project using our own resources” Magufuli said.

East Africans with long memories will remember another politician who said similar things: Meles Zenawi, a former Ethiopian premier. Ethiopia is an interesting case for Tanzania because Addis Ababa consciously tried to copy the Japanese and South Korean state-juiced development model.

The great commentator on South Korea, the late Alice Amsden, wrote about how it flouted economic orthodoxy during the period of its economic rise. Rather than allowing the market to set prices freely – a core tenet of free-market capitalism – officials would deliberately “get the prices wrong” by, for example, lending to industry at below market rates or using the powers of the state to distort costs for inputs.

“The neoliberal economic reforms undertaken by Tanzania since the late 1980s in the mining and other economic sectors have largely created an enclave economy in which a few wealthy individuals and multinational corporations benefit at the detriment of ­majority poor people in rural and urban areas,” says Japhace Poncian, a lecturer at Mkwawa University in Tanzania, who says Magufuli is riding on the public backlash against this – as well as Tanzania’s own socialist past under Julius Nyerere – to promote his vision.

Drift into authoritarianism

So it seems clear that Magufuli has chosen his side of the debate – he will use ‘economic nationalism’ to ‘get the prices wrong’, be that for cashews, gas or gold.

But will Magufuli make Tanzania rich? Or will it slide into mismanaged, debt-burdened trouble?

Three great obstacles lie in his path:

  • First, a reckoning with capital.
  • The second is the ineffective bureaucratic tools with which he wants to execute his great leap forward.
  • Third is a drift into authoritarianism that disconnects the executive from the best available righting mechanism for development: the public.

The first is best summed by the negotiations over Acacia Mining. For Kabwe, this is a classic example where posture is more important than the result: “Some $300m is not enough to launch an industrial revolution:, and efforts to hook industries such as gas and mining to local operators – known as ‘local content’ in the business – seem patchy at best.

Then take, for example, the cashew confiscation: while Amsden vaunted South Korea’s ability to ‘get the price wrong’, there was always a final goal in mind, more often than not the upskilling of a particular industrial subsector. “There are a few examples involving the president himself and some of his government officials taking initiatives to bring private operators closer by convening meetings to learn of their challenges and issues,” says Poncian. “The impact of these initiatives in terms of moving up the value chains is yet to be seen.”

Here, the cashew price bump is good politics. But is it good economics? Reports have emerged about a shadowy company called Indo Power Solutions, which has entered into a $180m deal with the government to buy 100,000tn of cashews, despite lacking any experience in the commodity.

‘Question mark’

Certainly, the threat of $190bn tax bills and the prospect of the army guarding cashews have made foreign investors circumspect about whether or not to put money into the country. “We believe that there is a question mark about future policies around ownership of businesses,” says Konstantin Makarov of StratLink, a boutique investment adviser for East Africa.

But Tanzanian officials are adamant they are not attempting to make a hostile environment for foreign capital.

“It’s not the aim of the government to frustrate investors but we want to have a win-win situation. We want to prove to stakeholders that nobody is missing out,” Charles Sangweni, the acting director general of the Petroleum Upstream Regulatory Authority tells The Africa Report. His institution is in charge of looking at contracts signed under previous administrations. “We are doing the review for two purposes. First is to clear the environment by proving that whatever was agreed was good. But second, we are laying the baseline for establishing a new production-sharing agreement for future investments,” he says.

The second key stumbling block is the tool Magufuli is wielding to effect change: the bureaucracy. Japan had its legendary cadre of technocrats in the ministry of trade and industry. But in Tanzania, “there is total confusion,” says Kabwe.

This is partly because of the 180-degree turn in focus, from the more free market-­driven years of presidents Mwinyi, Mkapa and Kikwete to the more state-driven economic turn of Magufuli. But it is also due to a lack of investment and discipline that has eroded the professionalism of the civil service. “We need a new generation of bureaucrats now,” argues Kabwe.

It matters, partly because of the complexity of economic planning, but also because of the dangers of ‘state capture’, as the South Africans euphemistically call the purchasing of top government officials by corporate interests. “Yes, we may have a highly trained bureaucracy, but this is rarely insulated from political and economic interference,” says Poncian.

The final obstacle that may trip up the attempt to make Tanzania rich using economic nationalism is the creeping violence that characterises the regime. “At lunchtime on 7 September 2017, I was followed home from parliament,” wrote Tanzania’s chief whip Tundu Lissu in the pages of The Africa Report. “Outside my home, two gunmen emerged from a car and opened fire at close range with sub-machine guns. My car was sprayed with 38 rounds of bullets, 16 of which hit my body. I was flown to the Nairobi Hospital in Kenya for emergency treatment. My lead surgeon later told me that I lost my entire stock of blood three times over.”

“Magufuli has led a sharp authoritarian turn. This gives him freedom to manage and perhaps curtail rent-seeking, but it will undermine the institutional checks on it too,” according to Dan Paget of University College London. “Worse still, it will leave an inheritance of centralised power to his successor.”

And the data is in arguing that democracies grow faster, according to the data in a new report, Africa: A Divided Continent by the Bertelsmann Foundation. It says democracies outperform their authoritarian counterparts nine times out of 10.

Changing relationships

In fact, argues Kabwe, Tanzania needs a form of mild economic nationalism ­coupled with vigorous democratic practice – Mauritius, Morocco and Botswana all show what can be done when the state gets involved in the economy and the people get involved in politics: “People always want to compare us; either to South Korea or Rwanda, but the context is just so different – we are not developing after a genocide, nor are we in a violent civil war”.

Kabwe points to the 1967 Arusha Declaration as a foundational national moment. This allowed Tanzania to get beyond much of the tribalism that plagues much developmental progress on the continent, with its distributional fights between various groups who want to monopolise resources.

Those challenges – capital, ­bureaucracy, autocracy – are sizable hurdles. Can Magufuli clear them? Perhaps – certainly his relationship with investors is changing. He desperately needs revenue to fund big infrastructure projects he has promised, and Roskilde University fellow Thabit Jacob says that Magufuli has realised that he cannot do that if he alienates foreign partners: “Even the language has changed now. He once called foreign miners thieves, but he recently referred to them as genuine partners.”

And a mild economic nationalism balanced with investor interests is not just a romantic notion, either. Jacob points to Chile as a “good example where a mix of resource nationalism, a credible state-owned company and respect for investors has proved successful”.

 

Additional reporting by Joseph Burite in Dar es Salaam

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