Tanzania: Explaining Four Decades of Episodic Growth1 Chapter 13 of volume 2

Investment productivity while increasing is retarded by low capacity utilization, transportation costs and low skilled labor. Low capacity utilization is associated with poor delivery of services by the utilities such as water and electricity. The supply of these utilities has been irregular forcing industries to run at sub-optimal levels or incur the additional cost of generators and water pumps. Utility costs seem to be higher in Tanzania than in other East African Countries with Tanzanian businesses paying twice as much for electricity and fuel than those in Kenya (IMF 2004).²⁷ Recent moves to improve management of these utilities are expected to result in an improvement in service delivery. Telecommunication costs in Tanzania are three times higher than in Kenya and two thirds higher than in Uganda (IMF 2004). As a coastal state, Tanzania’s transport costs would have been lower and external competitiveness higher if transport and communication infrastructure was not as dilipated. This is aggravated by the concentration of economic activity, in particular agriculture, fishing and mining, in outlying peripheral areas far from ports and major consumption centers. However, current account liberalization and improved technology have eased non-physical constraints to traffic/trade flows, for example, cumbersome documentation procedures and bureaucratic hurdles.

Labor productivity has been low and is falling partly because of the impact of HIV and AIDS and the low skill base. In addition, the level of professionalism remains low as the legacy of socialism on work culture remains specifically, it has not recovered from the lack of incentives to invest and work harder for individual improvements.

Despite the structural reforms undertaken the external perception of investing in Tanzania remains fragile and expansion of local small and medium enterprises is hampered by financial disintermediation. Given decades of peace and security in an unstable region, Tanzania is generally associated with low political risk. More recently, the perception of economic risks seems to have declined and private sector activity continues to expand domestically. However, despite the relatively high foreign direct investment (FDI) that Tanzania has received, it can be argued that the external perception of undertaking business in Tanzania remains fragile with investment mainly geared towards the mining sector (40%). In order to induce FDI in other sectors the legal and regulatory environment should be strengthened. Investors need assurance that they can without delay get justice before the law. The introduction of the commercial court in Tanzania is a movement in the right direction. In addition, lending rates remain high and credit allocation remains limited to a narrow set of investors hampering the development of small and medium enterprises. On-going measures to create credit information bureau and improve the judicial process of loan recovery would reduce the costs associated with lending.

Despite the reforms over 70 percent of the population are engaged in smallholder agriculture. Rural household incomes have declined continuously while real prices of consumer goods have been rising with the decrease in income partly attributed to the decrease in producer prices particularly cash crops and the increase in agricultural input costs following de-control of prices (Cromwell et al. 1996). However, low agricultural input prices do not increase farmers’ supply response if agricultural inputs are unavailable. Reflecting this, public debate on market reforms has focused on the provision of social services in a market economy as opposed to reversion to the era of market controls and food shortages (Ponte 1998 and 2002a).

Rural livelihoods remain hampered by financial disintermediation, poor transportation and low producer prices. Most of the population remains marginalized with no access to financial services. Microfinance institutions have alleviated the situation, however, these tend to be located in more accessible rural communities. Rural feeder roads are poor and often inaccessible during the rainy season. This has hampered the development of the rural economy. The elimination of price support and subsidies has been a major disincentive to production particularly of export crops (Bienefield, 1995). Low commodity prices for example for coffee and cotton have led to a situation where smallholders have substituted such cash crops for food crops and dairy industry and led to a virtual collapse of cotton production (Ponte 1998, 2002a, and 2002b).

Agricultural production was expected to grow within the framework of “ujamaa” villages in which the traditional system of rural settlement dominated by individual plots were large and replaced with large communal villages managed by peasants themselves for their own benefit. However, recent changes have led to a shift towards individually owned “shambas” (plots), more or less as it was before the Arusha Declaration of 1967. The challenge for agricultural transformation persists, in particular, peasants need to be encouraged to produce not only for their own consumption but also for export.

It is also noteworthy that during the early post-independence period the prize to freedom fighters for successfully wresting power from the colonial masters dubbed “fruits of independence” was increasingly used to signal that it is now “our” turn. Like in many other African countries, with Botswana as an important exception, the indigenization program was the main channel for rewarding those who made the sacrifices, and the rewards were in various forms of rents – ranging from jobs to preferential access to productive assets.

The private sector in these economies in essence was part of the covenant with the state that granted it protection, access limited to subsidized resources and significant rents derived from protection. In the early phase, the Government put in place an investment promotion scheme offering primarily rents from protection measures to attract foreign firms to engage in light import substitution. In many cases, a strong symmetry of interests existed between the public and the private sectors as far as price distortions, protective measures and access to subsidized resources were concerned (Ndulu 2004). After initial success of this strategy, signified by rapid growth of light manufacturing, the risks associated with the shift towards a socialist regime, expropriation being the most blatant, far outweighed the rents from the above mentioned preferential treatment. Reflecting the higher risks associated with socialist regime, there was an exodus of foreign private capital in the early 1970s and closing doors to new capital. In response, economic nationalism was promoted through mainly state enterprise and the encouragement of politically-connected indigenous private sector.

Alas, under developmental autocracy, policy has tended to be captured by a narrow group of elites operating under relatively weak institutional constraints. The tendency, under a strong control regime, to over-tax potentially dynamic sectors and a heavy reliance on revenues to service patron-client networks created vulnerable balance of payments and fiscal positions. Rents from the control regime were largely based on scarcity of import capacity giving scarcity premium through rationed import licenses; under-priced capital, giving access to subsidized capital to those who are politically connected, and sustenance of a large public sector for serving political patronage through jobs. Persistence of macroeconomic policy distortions was sustained partly for the above reasons as the regime attempted to close the resource gaps exacerbated by shocks through applying more stringent controls.

What is striking about this model of Tanzania’s early phase of development is its strong endorsement by development partners as evidenced by the large inflows of aid and official credit to fund the program. The thrust of the redistributive strategy and diversification of the economy through deepening import substitution was then in vogue with the global development paradigm of the day. The large role of the public sector was in line with the dominant view of the 1960s and 1970s of preponderance of market failures – needing public sector interventions, though not necessarily in a socialist approach- before the swing of the pendulum towards a development paradigm that emphasized government failure in the early 1980s. As noted earlier, there was strong external support for the largely populist regime, which though clientelist in orientation, like a handful other populist African regimes, strived to serve the interest of the poor majority mainly through a redistributive program, dubbed African socialism.

Another striking feature of the control regime is the protracted failure to recover from external shocks. We find explanation in the inability of the control regime to undertake a prudent management of booms and bust. The institutional framework through which Tanzania encountered shocks to commodity markets in the 1970s and to world financial markets in the early 1980s offered limited flexibility to make the required but difficult adjustments. A typical example of the pattern of response to shocks constrained by inflexibility is that in relation to the commodity price boom of the mid 1970s (1975-77) followed by the second oil crisis in the late 1970s and exacerbated by the huge costs from war with Idi Amin of Uganda (1978-79). Tanzania weathered the first oil crisis by tightening import and exchange controls, as well as drawing down automatic and quick-disbursing facilities such as the oil facility operated by the IMF. The tropical beverage (coffee) boom of 1976/77 seemed to validate this strategy and even led to renewed expansion of spending (Bevan, et al. (1989,1990)). When the prices of export commodities collapsed in 1978 and the second oil crisis erupted in 1979, government expected a similar short-lived crisis and a quick reversal of fortunes. But resource shortfalls worsened with the recession in the world economy and the debt crisis of the early 1980s. Calls from donors, in particular from the multilaterals for the curtail aggregate demand in particular the unsustainable expenditure on provision of universal access to social services were ignored. The government faced with pressure to close the resource gap and sustain patronage system undertook deficit financing.

A recourse to raiding the already fledgling private sector and more stringent controls of the private sector, heightened investment risk and led to a virtual collapse of private investment during this period. The forced savings arising from frustrated demand as domestic supply of basic goods declined sharply resulted in a disproportionate squeeze on consumer imports reinforced the decrease in incentive to production. As the balance of payment crisis persisted and shortages intensified, a wide range of controls including stringent price controls, food rationing by state agencies, mandatory surrender of proceeds from exports and foreign exchange controls were intensified. The government faced with pressure to close the resource gaps and sustain patronage system imposed import restrictions, tax increases and utilized deficit financing. This resulted in high inflation rates and sharp decline in real wages – further fuelling withdrawal from the official economy by a wide range of economic agents which in turn undermined the revenue base of government and officially recorded exports. Under-reporting of export proceeds and over-invoicing of import needs was high during this period. Some estimates put the level of smuggled exports to 50 percent reflecting the move from official exports to underground economy (Adam et al. 1994).

The government noted that Tanzania’s need for external resources did not imply a loss of independence in setting its economic goals. With support from sympathetic donors, Tanzania was able to forge a “homegrown” economic recovery program following the collapse of its relations with the World Bank and the IMF in the late 1970s. The government emphasized that it would not make any concessions, in particular, it vetoed privatization arguing that this would imply renouncing socialism. In addition, it refused to adopt market incentives as this would imply repudiation of egalitarianism. Furthermore, the government resolved to continue its national policy for economic integration at the expense of restructuring of its export sector. It also resisted selective austerity in provision of social services and remained committed to providing universal social services. The program failed to address the core economic weaknesses of the country as evidenced by maintenance of large budget deficit and worsening current account.

It is noteworthy to elucidate the motivation of the change from strong to soft controls building on our discussions in the previous section. An untold story is the internal dynamics for change, when the contract of promised development did not materialize and societal cynism about this model of development set in. Within the logic of the weak autocracy framework of governance, there are two main underlying trends, which make the demise of the regime imminent. First is the time inconsistency of the system of rent extraction in the absence of growth due to distortionary effects of taxation and the fact that very soon these types of distortions get the system to the wrong side of the Laffer curve. Second there is an assumption that the multitude of the unorganized interest groups, including the peasantry is politically passive and acquiescent to the benevolence of the state, even if state actions are geared towards catering for the interests of favoured and vocal groups. The government totally underestimated the potential of grassroots responses to frustrate predation²⁸.

The revenue base and aid were the most important political resource for servicing patron-client networks. Their erosion through faltering revenue collection and the reduction of aid after 1981 undermined the capacity of the political patrons in Tanzania to service their networks of clients. Economic stagnation due to under-investment in productive capacity and the increased proportion of the economy that went underground, had a negative impact on the tax base. The steady preponderance of controls to create rents for the favoured groups was the main reason behind the mushrooming of parallel markets and illegal cross-border trade to evade them. This development not only undermined the fiscal base of the state but also led to the collapse of exports significantly reducing rental incomes which hitherto were available to service patron-client networks.

There was also the latent tension between grassroots interests and the purported national interests advanced through state policies. Traditional social structures are characterized by the dominance of relatively autonomous networks bound by kinship, tribe, religion, race or community ties. These networks span across rural-urban boundaries in what Hyden (1983) calls the ‘economy of affection’ and the state is structurally superfluous and is only acknowledged to the extent that its actions are considered beneficial to the interests of these networks. Where government policy is deemed unbeneficial or a threat to their interests, these networks through their own communication systems have frustrated such policies through the use of a variety of ‘exit options’(Hyden 1986).²⁹ These exit options include participation in parallel markets, illegal border trade and even informal banking systems. These grassroots networks have proved to be a potent force of frustrating predation, when their own interests are ignored.

The roots of a shift away from hard control and authoritarian regime to a more encompassing economic governance system lie in the above developments. Conditionality associated with adjustment finance has to a large extent amplified these latent pressures for change and catalyzed the process. By the time the externally enforced adjustment had taken effect in late 1986 in Tanzania, the traditional role of the state had become unsustainable. The government had overextended itself relative to its financial and managerial resources and the society's cynicism of the effectiveness of development institutions and management had set in. Pressure for dismantling controls was being expressed by rampant evasion of controls. Removal of the failed controls and downsizing of government operations was essentially a forgone conclusion given the latent opposition of controls, emerging unsustainable resource gaps, and the rising debt service burden in the fiscus. Meanwhile, the global change towards a minimalist government gathered momentum and was brought home through aid relationships and international governance. The advent of Reagan-Thatcher influences on economic policy throughout the world had further darkened external views of Tanzania’s policies (Helleiner 2000). Furthermore, with the advent of democracy, the threats of removal of a regime from power rather than the use of latent exit options presented an additional imperative for enforcing more encompassing behaviour.

The shift in ideology towards market orientation and private sector development was gradual involving consensus-building within the ruling party and across the party’s spectrum. It relied on the members accepting and perceiving the reforms as integral to the party’s manifesto as opposed to running contrary to the party’s ethos. The political resistance to reforms was strong, since the liberalization of the economy represented a U-turn from the development strategy outlined in the Arusha Declaration. The openness and inclusiveness of the consultative process in the national debates led by the civil society, including academics, helped clarify and broaden the understanding of issues and legitimized the need for economic reforms (Bigsten et al. 1999). The government’s use of national commissions as instruments for collecting views and building consensus on issues broadened the domestic constituency for reforms, reinforced internalization of the process instilling ownership of reform process. Though the more gradualist approach had dangers creating tensions with donors, in the end popular discussions of hard policy choices and their sequentialization reduced the dangers of policy reversals. The legacy of acrimonious debate with the Bretton Woods institutions (BWI) and the country’s commencement of initial reforms without their support provided the government with leverage with which to vocalize its socio-economic concerns within the country’s own socio-political framework.

The return to adjustment program resulted in a surge in aid, with foreign assistance excluding technical assistance rising from 4.2 percent in 1985 to 17.4 percent of GDP in 1990. The support was possibly instrumental in the success of the adjustment process. It is difficult to know how the adjustment could have been undertaken without the cushioning effect of donor aid (Bigsten and Danielson 1999).

However, the shifting fortunes of various stakeholders induced policy inconsistencies and reversals particularly in the early 1990s. Two factions emerged: those supporting limited and guided liberalization (‘nationalistic liberalizers’) and those supporting a more open approach ('free marketers'). A significant proportion of the political elite had perceived the shift to market-oriented policies in the late 1980s as a temporary setback in the face of crisis which meant that support for the reforms was not always wholehearted (Bigsten and Danielson 1999). The decision as to which type of reform to undertake, its course and pace was influenced by the state, societal interest groups and donors (Rutasitara 2004). During the last years of Mwinyi’s Presidency, leadership weakened derailing the economic program and rent seeking dominated the political and business environment. Government expenditure as a share of GDP was almost double that of SSA. This led to an erosion of donor confidence resulting in wide scale exodus of donor aid in mid-1990s and an impasse in donor-government relations. The increased uncertainty with regard to the government’s stance resulted in a decrease in investment as a share of GDP, from its peak of 40 percent in 1990 to 26 percent in 1994.

Conditioning aid on policy measures was a source of tension between government and donors. The government perceived it as eroding its sovereignty in pursuing national development objectives emphasizing the importance of ownership and space for internal dialogue. In 1994, the Helleiner process was initiated to mediate between government and donors, and provide an institutional framework for accountability within the context of government ownership of the reform process.³⁰ As a result, government – donor relations evolved from confrontation to partnerships approaches. Direct dialogue with development partners has been an important catalyst in Tanzania’s economic reform process contributing indirectly to the development of homegrown programs (Muganda 2004). The Independent Monitoring Group, an outcome of the Helleiner process, now serves as an instrument of mutual accountability and a performance monitoring tool.

Reflecting the policy inconsistencies during the period 1990 to 1994, the government adopted important positive legislative reforms on the political scene, providing freedom of political associations and preparing a framework for multi- partyism. There was a realization that an array of political and institutional issues could critically shape the outcomes of reform episodes and that there was therefore a need to put in place key complementary measures. The ruling party was separated from the government, trade unions, cooperatives and other mass organizations, and greater freedom of the press was provided. These measures were propelled by the government and the former President Mwalimu Nyerere (Helleiner 2000; Muganda 2004).

The credibility of the government coupled with the open and direct discourse with donors helped strengthen relations and partnerships with donors, improved aid coordination, reinforced government ownership and increased harmonization of donor practices with government processes. The government established a solid track record of policy implementation receiving endorsement from donors on its economic and institutional effort as evidenced by expanded level of donor support.

In addition, the government developed modalities for institutionalizing the then ad-hoc consultative process with the private sector evolving appropriate and effective macro and sectoral policies. Having put in place a now largely market-led economy, the main thrust of the reform effort was directed towards removing the remaining impediments to growth, rationalizing the structure of the government and strengthening public-private sector partnerships. In order to attract foreign direct investment, the government identified the mining sector as a pivotal sector whose regulatory framework could be used as an illustration of its change from nationalization policies.

Economic growth per capita accelerated significantly particularly after 1999 as the benefits from reforms kicked in. Growth improved reflecting the rebound of the non-agricultural sector, which currently accounts for more than half of export earnings, and improvements in the country’s external competitiveness. Inflation declined from 8 percent in 1999 to less than 6 percent in the ensuing years reflecting the government’s adherence to a strictly restrained monetary policy in the context of a market-determined exchange rate system. In addition, improvements in governance and strengthening of institutions resulted in an improvement in Tanzania’s overall ranking in the corruption index. In 1998, Tanzania was on the 95 percentile relative to other countries in the ranking, however it is currently on the 60^th percentile and stands well particularly when compared to other SSA countries (ICRG 2004).

The macroeconomic improvements have not been matched by significant progress in social welfare; the challenge therefore is raising the effectiveness of public sector service delivery further. The booming capital intensive mining industry is not creating commensurate number of jobs. In addition, the transition from emphasis on macroeconomic stability to structural reforms in the civil service and divesture of major parastatals was not easy. There was latent distrust of the private sector activities especially since the booming non-traditional sector has absorbed only a small share of the labor force. The nostalgia for the socialist days when social services were provided “free” remains, coupled with political anxiety with regard to benefits from reform. Specifically, there are concerns over the dualistic development of the economy with growth in urban centers and stagnation in rural areas. As over 70 percent of the population resides in rural areas, the challenge facing the government is providing an environment conducive to rural sector growth thereby translating macroeconomic stability into higher overall growth. The escalating costs of living, necessitates concerted efforts to ensure that the introduction of user charges does not aggravate poverty. However, it must be emphasized that part of the strain on incomes reflects the impact of the AIDS epidemic which is putting the social fabric of society under severe pressure.

Reflecting the elevated status of poverty reduction in the government’s objectives, policies have been developed to reverse the deterioration of the social indicators and, in the face of tightening fiscal environment, improve the delivery of social services. The government initiated the process of devolution to boost the effectiveness and efficiency in the delivery of basic services, as well as to address issues of equity, participation and accountability (Romeo 2003). Devolution was achieved through the transfer of significant powers and responsibilities to locally elected authorities. In order to develop capacity of local government, the national government agreed to allocate 20 percent of its budget to the provision of basic social services. Although this proportion is small, it represents 75 percent of local government funding. Priority sectors were identified for which budgetary allocations were protected. By redistributing power and extending the influence of the centre over the periphery through patronage relationships, it solidified political stability.

The government’s sustained commitment to economic reforms triggered its eligibility for debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) initiative in 2000, making it one of the first countries to reach the completion point and to benefit from irrevocable and substantial debt reduction. Tanzania received one of the largest amounts of Paris Club debt relief in SSA during this period. Debt reduction in turn paved the way for additional aid inflows allowing the government to increase budgetary expenditure allocations to social sectors and other priority sectors. This has led to the visible improvements in public service delivery, in particular, education and health.

In order to prevent aid dependence undermining the domestic control of the development agenda, institutional arrangements have been set that tie program aid within the multi-pronged national objectives since 2002.³¹ This enables transparency and has fostered the strengthening of governance contributing to the sustenance of donor support. In addition, by incorporating the national development strategy within this institutional arrangement, the government can focus on stimulating rural development within an overall framework that does not constrain the achievement of its other objectives such as sustaining macroeconomic stability. However, the continued maintenance of low revenue as a share of GDP (which at 14 percent remains the lowest in SSA) suggests that the government’s growth objectives remain highly dependent on continued donor support. Therefore the reform process remains vulnerable to a continued positive government-donor relations and exogenous factors, including geopolitical uncertainties. Moreover, the rise in aid dependence may eventually impinge on ownership of the reform process. Collier (1991) and Ndulu and O’Connell (1999) have noted that where donors pay for reforms, there is a danger that ownership by citizens will be sacrificed.

Sustaining the reform process beyond the current Presidency remains to be seen. The Tanzanian leadership has played an important role in advancing the reform process with the work of each President serving as a building block for the next set of reforms. It remains to be seen whether political cohesion will be a sustained force in the context of a democratic process with various players. The legacy of consensus-building and participatory decision-making within the political process has reduced the scope for dramatic reform action by incoming new leadership. However, ownership has been embedded in the politico-institutional framework with political parties at the helm. This suggests that the policy environment remains susceptible to the political process despite the institutionalization of the reforms within the policy making system.

Nevertheless, Tanzania has managed to steer clear of political destabilization introducing and effectively managing the transition to political pluralism and encouraging the proliferation of civil society organizations. The legacy of the one-party system and state controlled economy has faded and new legislative and institutional frameworks have been established to ensure continuity of multipartyism. One of the most important political achievements in Tanzania is strict adherence to the stipulations of the constitution, including that limiting Presidential terms to two. This suggests that the legacy of smooth transition of reform process will be maintained.

6. Conclusion

Economic decline during the strong control regime was largely due to the negative effects of the Ujamaa policy on economic efficiency. Principal-agent problems emerged undermining the efficiency and effectiveness of the state agencies and parastatals. Production costs were determined in an ad hoc manner by centralized planning agencies that did not have full information on costs. Managers had an incentive to inflate production costs and accrue rents from subsidies provided. Low wages in the civil service encouraged collusion in the embezzlement of funds. The state-controlled marketing institutions and parastatals faced fierce competition from parallel market traders who operated mostly at night and usually connived with government officials. Protection of the industrial sector from outside competition weakened incentives to produce more efficiently. In addition, the restriction on imports induced smuggling from neighboring countries. The failure of government economic policy in the early 1980s was reflected in shortages of food and consumer goods, negative industrial sector growth, and persistent balance of payments problem despite high import tariffs and quantitative controls on imports.

The implementation of broad–based economic and structural reforms has resulted in a rebound of the economy. The period 1985 to 1995 was marked with renewed growth following trade liberalization. However, weak governance coupled with delays in structural reforms and decline in donor support had an adverse effect on growth. The period from 1995 onwards is marked by intensified reforms which have resulted in an overall rise in TFP and a rise in real GDP per capita. Inflation, which for over 2 decades was over 25 percent, has been reduced to single digits. However, with over 70 percent of Tanzanians residing in rural areas and engaged predominantly in subsistence agriculture, the remaining challenge is translating the fruits of economic growth to the people. To realize this, the government has intensified its efforts to stimulate the traditional sector and to transform the value added to agricultural produce.

Development partners have been, and continue to be, an important and integral part of the reform process. What is striking about Tanzania’s development trajectory is the strong endorsement by its development partners as evidenced by the large inflows of aid and official credit to fund the programs. External assistance supported the government during the socialist regime as it sought to achieve growth through public sector delivery in an “essentially co-operative, arms-length relationship”.³² As pressure increased for a change in the orientation of the economy mounted, financial support was provided, though couched in confrontation terms, between 1980 and 1985. The renewed collaboration post 1986 enabled the government to aggressively reverse the socialist policies, resurrect the economy and improve public sector service delivery. The implicit role of donors as adjunctors and monitors of government’s performance was demonstrated through the withdrawal of assistance. The fatigued international donor community withdrew support when the government was reluctant to adopt economic reforms, in response to economic crisis in the early 1980s and also in the mid-1990s, when macroeconomic reforms faltered. Following the Helleiner process, and particularly after the emergence of the third regime government in 1995, Tanzania has maintained a candid, cordial relationship with donors. This reflects its focus on improving governance and achieving stable macroeconomic environment. Increasingly, some kind of balance is emerging, aided not least by a proactive civil society.