Research report No 120 Arne Bigsten and Anders Danielson Tanzania: Is the Ugly Duckling Finally Growing Up? Nordiska Afrikainstitutet Uppsala 2001 Indexing terms Economic performance Economic policy Emerging markets Political development Structural adjustment Public sector Tanzania Language checking: Elaine Almén ISSN 1104-8425 ISBN 91-7106-474-5 © the authors and Nordiska Afrikainstitutet 2001 Printed in Sweden by Elanders Digitaltryck AB, Göteborg 2001 Contents Introduction............................................................................................................................... 7 Background ............................................................................................................................... 7 Growth determinants.............................................................................................................. 9 Criteria of an emerging economy .................................................................................... 10 Outline of the study............................................................................................................. 13 Part I AN OVERVIEW OF LONG-RUN ECONOMIC PERFORMANCE AND POLITICAL DEVELOPMENTS .......................................................................... 14 I.1. Introduction ..................................................................................................................... 14 I.2. The pre-Arusha period 1961–1967 ........................................................................... 14 I.3. The pre-Crisis period 1968–1978............................................................................... 15 I.4. The Crisis period 1979–1985....................................................................................... 17 I.5. The Reform period 1986– ............................................................................................ 19 I.6. Welfare impacts of the reforms ................................................................................. 22 I.7. Aid and aid dependence.............................................................................................. 24 I.8 Tanzania in the region ................................................................................................... 27 I.9. Concluding remarks ..................................................................................................... 27 Appendix A: A note on the national accounts of Tanzania ................................... 29 Part II MACROECONOMIC POLICIES TO PROMOTE STABILITY.............................. 32 II.1. Introduction.................................................................................................................... 32 II.2. Public finance................................................................................................................. 32 II.2.1. Introduction.......................................................................................................... 32 II.2.2. Aggregate fiscal performance ........................................................................ 32 II.2.3. Revenue ................................................................................................................. 34 II.2.4. Expenditure.......................................................................................................... 37 II.2.5. Deficit financing and inflation....................................................................... 40 II.2.6. Conclusion ............................................................................................................ 42 II.3. Exchange rates and exchange rate policy............................................................. 42 II.3.1. Introduction.......................................................................................................... 42 II.3.2. Exchange rate regimes...................................................................................... 43 II.3.3. Exchange rate misalignment .......................................................................... 46 II.3.4. Exchange rates and macroeconomic policy .............................................. 48 II.3.5. Conclusions .......................................................................................................... 50 II.4. Debt and debt policies ................................................................................................ 50 II.4.1. Introduction.......................................................................................................... 50 II.4.2. Structure and development of the external debt..................................... 51 II.4.3. Conclusion ............................................................................................................ 53 Part III STRUCTURAL POLICIES TO PROMOTE LONG-RUN GROWTH .................. 55 III.1. The structure of production and trade ................................................................ 55 III.1.1. Introduction ........................................................................................................ 55 III.1.2. Structure of production .................................................................................. 55 III.1.3. The export sector............................................................................................... 57 III.1.4. Imports ................................................................................................................. 59 III.1.5. The non-traded sector ..................................................................................... 63 III.1.6. Concluding remarks ........................................................................................ 64 III.2. Financial liberalisation .............................................................................................. 64 III.2.1. Introduction ........................................................................................................ 64 III.2.2. Institutional and structural reforms........................................................... 65 III.2.3. Impact on financial markets.......................................................................... 67 III.2.4. Savings and investments................................................................................ 74 III.2.5. Concluding remarks ........................................................................................ 77 III.3. Investments and social infrastructure.................................................................. 77 III.3.1. Introduction ........................................................................................................ 77 III.3.2. Investments and economic growth ............................................................ 78 III.3.3. Investment productivity................................................................................. 81 III.3.4. Social investments ............................................................................................ 84 III.3.5. Concluding remarks ........................................................................................ 87 Part IV PUBLIC SECTOR MANAGEMENT AND ECONOMIC PERFORMANCE .... 89 IV.1. Securing the private/public sector boundary .................................................. 89 IV.1.1. Parastatals and the soft budget constraint............................................... 89 IV.1.2. Progress on privatisation ............................................................................... 90 IV.1.3. Investment incentives ..................................................................................... 92 IV.1.4. The private/public sector boundary ......................................................... 93 IV.1.5. Conclusions ........................................................................................................ 94 IV.2. Good governance and policy reform ................................................................... 94 IV.2.1. Public sector management and mismanagement ................................. 94 IV.2.3. Public sector reform......................................................................................... 96 IV.2.3. Concluding remarks ........................................................................................ 99 Part V CONCLUSIONS .................................................................................................................. 100 V.1. Introduction.................................................................................................................. 100 V.2. Is Tanzania an emerging economy?..................................................................... 100 V.3. Policy conclusions for Tanzania............................................................................ 103 V.4. What should donors do?.......................................................................................... 104 Persons interviewed ........................................................................................................... 108 References .............................................................................................................................. 109 Preface The title of this report is inspired by the great Danish author Hans Christian Andersen who in the children’s tale “Den Grimme Ælling” (“The Ugly Duck- ling”) tells the story of a particularly ugly duckling. She is so ugly, in fact, that she is despised and disliked by all the other ducks and ducklings. After a long and painful period of