Matthew McCartney
Head of Research, Africa Urban Lab (AUL)
On September 2024, I attended a conference – Embracing Technology and Innovation and Catalysing a Vibrant Startup Ecosystem in Zanzibar – organised by the Zanzibar Research Centre for Socio-Economic and Policy Analysis (ZRCP).
Much of the conference discussion revolved around collectively approving big development mantras.
Technology is good!
Innovation is good!
Entrepreneurship is good!
Many at the conference were inclined to accept these mantras as self-evidently true and then jump to the conclusion that Zanzibar needs to start more high-tech businesses and that the government should devote its time and capacity to building a supportive ecosystem.
Demonstrating that something is good or desirable is not enough in itself to then advocate for it as a policy priority. This article is helping to explain why, asks five questions that need answers before Zanzibar embarks on a national effort to build a high-tech start-up eco-system.
Why do we need to Focus on the Start-up Eco-system when Zanzibar already has a start-up culture?
Tanzania already has one of the highest rates of business start-ups in the world. A 2016 study estimated that there were 5 million non-farm businesses operating in Tanzania. Official government survey statistics for 2022 found that self-employed non-agricultural workers constituted 41.7% of total employment in Zanzibar.
By comparison, US Bureau of Labor Statistics survey data showed that in 2015 only 12.1% of workers were self-employed. Relative to population four-times as many Zanzibaris as Americans are entrepreneurs.
The problem that policy makers in Zanzibar must address is not in starting, but in growing existing businesses or attracting foreign business to invest in Zanzibar.
It is not lots of small firms that will make a difference for Zanzibar, but a small number of productive large firms. Across Africa surveys find that firms with more than 50 employees do the vast bulk of exporting and have much higher levels of productivity. A focus on start-ups is to turn policy attention to something that Zanzibar is already good at doing.
Is the focus on Start-Ups too Restrictive?
There is a danger that an exclusive focus on start-ups will miss the most important constraints on firm growth. The 2020 World Bank Doing Business survey of Tanzania found that Tanzania ranked 162nd (from 190 countries) in the ease of starting a business, revealing that a start-up policy would tackle a key constraint to firm growth.
The survey also showed that Tanzania performed poorly in relation to dealing with construction permits (149th), trading across borders (182nd), and paying taxes (165th), but did relatively better on getting electricity (85th), and accessing credit (67th). These findings give a clear direction for the government on how to prioritise policy interventions, to ease doing business in Zanzibar, and so help existing firms to grow.
Why does Zanzibar need to host a start-up when it is so easy to enjoy the benefits of start-ups that were created elsewhere?
Children in Zanzibar derive life-long benefits from vaccinations, does this mean the vaccination has to be invented and developed in Zanzibar?
On my way to the ZRCP conference I used google maps (free), looked through the BBC website to catch up on some news from home (free), and watched a couple of YouTube videos of highlights from the recent US Presidential debate between Kamala Harris and Donald Trump (free).
A couple of weeks ago I flew to Dar Es Salaam airport from Zanzibar, thankfully avoiding the scrum of taxi drivers outside, I was able to book a taxi to my hotel using Uber. I don’t pay directly for Uber but costs are reflected in the fare, as the company receives a commission from all journeys.
I want to use a taxi app that works across the world, not a start-up confined to Zanzibar. Something closer to (Zanzibari) home is M-Pesa, launched in Kenya in 2007, it is a mobile phone-based financial service. M-Pesa allows users to deposit, withdraw, transfer money, pay for goods and services, and access credit and savings. Though developed in Kenya, by early 2013 it had five million registered users in Tanzania.
Why does Zanzibar need to produce high-tech when consuming it is so easy and often free?
What Lessons have been Learned from the Last Time that Tanzania-Zanzibar Launched a Program of Import Substitution?
After independence in 1961 Tanzania launched a 1960s-style start-up ecosystem. The government used tariffs on manufactured imports and subsidies to firms to make domestic manufacturing start-ups more profitable.
The policy was initially successful, the first five textile mills in Tanzania (such as Sunguratex and Kilitex) were established in the 1960s, as well as Kioo Limited for glass bottle manufacturing and Aluminium Africa (ALF) for aluminium products.
By the early 1990s the World Bank and others had declared this strategy of import substitution to have been an economic failure. In Tanzania many of the new textile mills were operating at only 10% of capacity. The Morogoro Shoe Company built with donor finance to produce shoes for export to the East African market, output never reached more than 4% of installed capacity. Inefficient industry was dependent on subsidies which by the 1980s hoovered up more than a tenth of all government spending.
If Zanzibar today is proposing to produce the technology that was previously being imported, this is similar in essence to the 1960s-style import substitution strategy. Proponents of a high-tech start-up ecosystem do need to ask the question; what lessons have been learned from the last time that Tanzania launched a program of import substitution?
Where is comparative advantage in the policy discussion?
The theory of comparative advantage states that if every country produces that good or service in which they have a comparative advantage, and imports those goods and services in which they have a comparative disadvantage, then everyone will gain from trade and the level of world incomes will increase.
The key ingredient in a high-tech start-up is skilled labour. A recent study by ZRCP found that 75% of start-up founders in Zanzibar had either a Bachelor’s or Master’s degree, this figure rose to 95% once those with a diploma or professional certification were included.
Table below shows that tertiary enrolment in Tanzania was similar to Rwanda, Ethiopia, but much lower than Kenya, India, Mauritius, and China. These latter countries also have large cities to which those university graduates have migrated and created large and accessible pools of high-tech workers – known in economics as an agglomeration externality. Such tech-cities include Bangalore, India (population 14 million), Nairobi, Kenya (4.4 million), and Shenzhen, China (17.6 million). The magnitude of these pools of tech-labour are beyond anything offered by the 800,000 population of Stone Town in Zanzibar.
To catch up with Kenya, Zanzibar would need to more than treble tertiary enrolment, not one State University of Zanzibar (SUZA) and one Karume Institute of Science and Technology (KIST), but three SUZAs and three KISTs. This expansion would take decades and a vast investment of public resources, which in turn would have an opportunity cost, fewer resources available for health, basic education, and infrastructure.
Gross Enrolment in Tertiary Education in Zanzibar and Other Countries
