Tanzania and the Problem of the Missing Middle: A Regulatory Reform Case of the United Republic of Tanzania

A diagnostic report submitted to the Government of the United Republic of Tanzania in 2004 revealed that 89% of real property and 98% of all businesses operate in the extra-legal economy. Data from the second cycle of the Poverty Reduction Strategy program shows that about 36% of the population live in conditions of income poverty. A National Development Vision 2025 aims at eradication of poverty by 2025 which calls for double digit GDP growth over the coming 15 years. This is possible for Tanzania, given its rich natural resources endowment, subject to transformation of the private sector into a dynamic engine of growth through formalization and growth of entrepreneurs that are the drivers of broad-based and shared growth. Tanzania’s dilemma of poverty in the midst of plenty is captured in the concept of the “missing middle”, featuring failure of micro firms to graduate into small and medium enterprises that would create a demonstration effect of the benefits of formalization. Tanzania needs efficient mechanisms for contract enforcement to stimulate economic linkages and encourage commercial banking lending. Tanzania needs an efficient labor market, focusing on skills improvement and competence rather than mandatory legislation as the basis for higher returns to labor. Tanzania, and countries with similar problems, need more efficient systems of information management on the business sector and registration of movable and immovable property. Implementation of the program for Business Environment Strengthening for Tanzania addresses these problems. This chapter highlights the hassles and vicissitudes of change management in a regulatory reform process in a developing country environment, and the instruments that are available to handle the challenges involved.