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The political economy of the investment climate in Tanzania Brian Cooksey and Tim Kelsall Research Report June 2011 01 Revised July 2011 Copyright: The authors. Published on behalf of the Africa Power and Politics Programme (APPP) by the Overseas Development Institute, 111 Westminster Bridge Road, London SE1 7JD, UK (www.odi.org.uk). The APPP Research Report series is edited by Richard Crook, Professorial Fellow, Institute of Development Studies at the University of Sussex, Brighton BN1 9RE, UK ([email protected]). The Africa Power and Politics Programme is a consortium research programme funded by the UK Department for International Development (DFID), with additional support from Irish Aid, for the benefit of developing countries. The views expressed in this publication are those of the author and not necessarily those of DFID, Irish Aid or the Programme as a whole. The political economy of the investment climate in Tanzania Brian Cooksey and Tim Kelsall∗ Although Tanzania suffers from an imperfect form of liberal democracy and high levels of corruption, it has attracted unprecedented levels of foreign investment over the past fifteen years, and is predicted by the IMF to be one of the fastest growing countries in the world over the next decade. This provides some grounds for thinking that Tanzania represents a case of ‘developmental patrimonialism’, a type of regime that achieves development without conforming to ‘good governance’ orthodoxy. This Research Report rejects that idea. Drawing links between the management of economic rents and the climate for business and investment, it shows that rent- management in Tanzania remains largely decentralized and undisciplined, with deleterious consequences for investors. In previously fast-growing sectors like mining, investors are increasingly circumspect, while high potential areas like horticulture appear largely ignored. The result is that recent increases in economic growth – which have yet to have a discernible impact on poverty reduction – are likely to be ephemeral. Tanzania, we conclude, is a case of ‘non-developmental patrimonialism’, and its regime is likely to face a mounting legitimacy crisis in coming years. The report is structured as follows. The Introduction discusses the link between rent- management and economic performance in comparative perspective, as well as introducing other important concepts, including ‘relationship-based governance’ and ‘developmental patrimonialism’; Section Two looks at the structure of rent-management across Tanzania’s post-colonial history; Section Three examines the impact of rent- management on public goods production and the investment climate in Tanzania over the past decade; Section Four analyses the political economy of the investment climate in export horticulture, while Section Five does the same for gold mining. In the Conclusion we discuss the contribution of institutions, political culture, and external relations to Tanzania’s non-developmental equilibrium, before commenting on some possible avenues of change. ∗ Associates of the Africa Power and Politics Programme ([email protected]; [email protected]). Cooksey and Kelsall, investment climate in Tanzania 1 Contents 1 Introduction ......................................................................................................................... 5 1.1 Conceptual bearings ..................................................................................................... 6 Economic rents ............................................................................................................. 6 The business and investment climate .......................................................................... 9 1.2 Comparative evidence ................................................................................................ 10 1.3 Research approach..................................................................................................... 12 2 The political economy of rents and development in Tanzania, 1961-95 ..................... 14 2.1 The early years, 1961-67 ............................................................................................ 14 Rents ........................................................................................................................... 14 Rent-management ...................................................................................................... 15 The investment and business climate......................................................................... 16 2.2 The ujamaa period, 1967-78 ....................................................................................... 17 Rents ........................................................................................................................... 17 Rent-management ...................................................................................................... 19 The business and investment climate ........................................................................ 20 2.3 Economic collapse, 1979-85 ....................................................................................... 21 Rents ........................................................................................................................... 21 Rent-management ...................................................................................................... 22 The business and investment climate ........................................................................ 23 2.4 The reform period, 1985-1995 .................................................................................... 23 Rents ........................................................................................................................... 23 Rent-management ...................................................................................................... 24 The investment and business climate......................................................................... 25 3 The political economy of rents in contemporary Tanzania .......................................... 26 3.1 Sources of rent in contemporary Tanzania ................................................................. 26 Transfers ..................................................................................................................... 26 Management and monitoring rents ............................................................................. 30 Natural resources........................................................................................................ 31 Monopoly rents ........................................................................................................... 31 3.2 The structure of rent-management ............................................................................. 32 Petty corruption and rent-scraping .............................................................................. 32 Grand corruption ......................................................................................................... 33 The role of the bureaucracy ........................................................................................ 36 3.3 The investment and business climate......................................................................... 36 The investment climate ............................................................................................... 36 Business environment ................................................................................................ 38 3.4 Conclusions ................................................................................................................ 41 Cooksey and Kelsall, investment climate in Tanzania 2 4 The political economy of the investment climate in horticulture ................................ 43 4.1 History and characteristics of the horticulture sector in Tanzania .............................. 43 4.2 The investment climate in Tanzanian horticulture ...................................................... 44 Political stability ........................................................................................................... 45 Natural resource rights ............................................................................................... 45 Finance ....................................................................................................................... 48 Market coordination .................................................................................................... 49 4.3 The business climate in Tanzanian horticulture ......................................................... 50 Taxation ...................................................................................................................... 50 Regulation and certification ........................................................................................ 52 Public goods ............................................................................................................... 52 4.4 Doing business in Tanzanian horticulture: formal versus informal approaches ............. .................................................................................................................................... 53 4.5 The structure of rent-management in Tanzanian horticulture .................................... 55 4.6 Conclusions ................................................................................................................ 56 5 The political economy of the