Balancing investment, consumption and employment in Tanzania: Why consumption and input-output multipliers matter for economic planning

Professor (Emeritus) of Quantitative Applied Economics, International Institute of Social Studies, Erasmus University Rotterdam, The Netherlands

January 2025

• 00 - Balancing investment consumption and employment in Tanzania IKD WP 92 Jan_25.pdf

This paper argues that the premise of promoting economic growth by tightening the belt on consumption is problematic in the Tanzanian context characterised by extensive surplus labour and rapid population and labour force growth. The role of consumption in the process of industrialisation is intimately linked with the question of absorbing labour in the economy. Planning from a long term perspective cannot just solely focus on setting a high target rate of growth and a high pace of investment without considering how the planned patterns of investment enable or constrain the trajectory of growth in employment and the production of wage goods over the planning horizon. The paper develops a macroeconomic conceptual framework that combines the circular flow of income with the circular flow of intermediate consumption. It uses Input / Output Tables and the Labour Force Survey data to demonstrate the importance of explicitly addressing industrial sectoral linkages and the composition of the labour force across sectors and across formal and informal employment to ensure that economic growth does not go at the expense of employment and consumption. The paper argues that multiplier analysis matters, not only as a tool for short run planning, but also within a long run perspective because the smooth operation of consumption and input-output multipliers in the future without hitting capacity constraints in the process depends on whether the future expansion of consumption and employment remains in tune with the pace and the patterns of investment today.