Is Tanzania an emerging economy? A report for the OECD project ”Emerging Africa” by Arne Bigsten Anders Danielsson Department of Economics Department of Economics Göteborg University Lund University Box 640 Box 7082 SE 450 80 Göteborg S-220 07 Lund Sweden Sweden May 1999 Contents 0. Introduction 0.1. Background 1 0.2. Growth determinants 3 0.3. Criteria of an emerging economy 5 0.4. Outline of the study 7 Part I: An overview of long-run economic performance and political developments I.1. Introduction 8 I.2. The Pre-Arusha period 1961-1967 8 I.3. The Pre-Crisis period 1968-1978 9 I.4. The Crisis period 1979-1985 11 I.5. The Reform period 1986- 13 I.6. Welfare impacts of the reforms 17 I.7. Aid and aid dependence 18 I.8 Tanzania in the region 21 1.9. Concluding remarks 23 Appendix A: A note on the national accounts of Tanzania 24 Part II: Macroeconomic policies to promote stability II.1. Introduction 27 II.2. Public finance II.2.1. Introduction 27 II.2.2. Aggregate fiscal performance 28 II.2.3. Revenue 30 II.2.4. Expenditure 34 II.2.5. Deficit financing and inflation (to be added) 38 II.2.6. Conclusion 41 II.3. Exchange rates and exchange rate policy II.3.1. Introduction 42 II.3.2. Exchange rate regimes 43 II.3.3. Exchange rate misalignment 45 II.3.4. Exchange rates and macroeconomic policy 48 II.3.5. Conclusions 50 II.4. Debt and debt policies II.4.1. Introduction 51 II.4.2. Structure and development of the external debt 51 II.4.3. Conclusion 55 Part III. Structural policies to promote long-run growth III.1. The structure of production and trade III.1.1. Introduction 57 III.1.2. The structure of production 57 III.1.3. The export sector 59 III.1.4. Imports 61 III.1.5. The non-traded sector 65 III.1.6. Concluding remarks 66 III.2. Financial liberalisation III.2.1. Introduction 67 III.2.2. Institutional and structural reforms 68 III.2.3. Impact on financial markets 70 III.2.4. Savings and investments 77 III.2.5. Concluding remarks 80 III.3. Investments and social infrastructure III.3.1. Introduction 82 III.3.2. Investments and economic growth 83 III.3.3. Investment and productivity 85 III.3.3. Social investments 88 III.3.4. Concluding remarks 92 Part IV. Public sector management and economic performance IV.1. Securing the private/public sector boundary IV.1.1. Parastatals and the soft budget constraint 94 IV.1.2. Progress on privatisation 95 IV.1.3. Investment incentives 97 IV.1.4. The private public sector boundary 99 IV.1.5. Conclusions 100 IV.2. Good governance and policy reform IV.2.1. Public sector management and mismanagement 101 IV.2.3. Public sector reform 102 Iv.2.3. Concluding remarks 106 Part V. Conclusions V.1. Introduction 107 V.2. Is Tanzania an emerging economy? 107 V.3. Policy conclusions for Tanzania 111 V.4. What should donors do? 112 Persons interviewed 115 References 116 ACRONYMS AIDS Acquired Immune-deficiency Syndrome BFIN Banking and Financial Institutions Act BOT Bank of Tanzania BIS Basic Industries Strategy CG Consultative Group CIS Commodity Import Scheme DAC Development Assistance Committee EAC East African Community ERP Economic Recovery Programme ESAF Enhanced Structural Adjustment Facility ESAP Economic and Social Action Programme GDP Gross Domestic Product GOT Government of Tanzania HIPC Highly Indebted Poor Countries OGL Open General License IBRD International Bank for Reconstruction and Development IFIs International Financial Institutions ILO International Labour Organisation IMF International Monetary Fund LART Loans and Advances Advances Realisation Trust MDF Multilateral Debt Fund NBC National Bank of Commerce NCPI National Consumer Price Index NESP National Economic Survival Programme NGOs Non-Governmental Organisation NPV Net Present Value OECD Organisation for Economic Development OPEC Organisation of Petroleum Exporting Countries PSAP Priority Social Action Fund PSRC Parastatals Sector Reform Commission SAP Structural Adjustment Programme TAC Tanzania Audit Co-operation TAKWIMU Tanzania Bureau of Statistics THB Tanzania Housing Bank TIC Tanzania Investment Centre TZS Tanzania Shilling VAT Value Added Tax WDI World Development Indicators 0. Introduction 0.1. Background The last few decades have seen dramatic economic improvements in large parts of the Third World, while African economies in general experienced stagnation or decline until the early 1990s. During the last few years, however, there seems to have been a revival in parts of Africa. Many countries have initiated economic reform programmes, and some have seen significant increases in per capita incomes for the first time since the early 1970s. At the same time as these changes are underway, there has been a decline in aid flows from the developed countries. This partly reflects a decline in external political interest in Africa following the demise of the cold war as well as economic problems in donor countries, but it also may reflect an increasing concern about the effectiveness of aid in its traditional forms. Private resource flows to the third world accelerated dramatically during the 1990s, but so far they have largely bypassed Africa. At this juncture there is a need for a reconsideration of the aid relationships in this new environment, and to investigate what the new situation in Africa implies for future aid to the continent. OECD’s study of “Emerging Africa” sets out to contribute to such an understanding. The OECD describes the rationale for the study as follows: “It is widely recognised that poverty alleviation cannot be achieved without economic take-off in least developed countries. Historical experience shows that, starting from very poor conditions, take-off can occur if the right policies are implemented (Berthelemy, Varoudakis, 1998). However, this is not a uniform process. Undoubtedly, there will be leaders and followers, as suggested by East Asia’s experience of economic take-off, which was initially led by a few economies - Japan, Korea and the Chinese Taipei. In order to maximise the chances of success of the OECD Development Co- operation strategy (DAC, 1996), it is proposed to identify those countries which have the best success likelihood in the short and medium terms, i.e., those countries which are on the right track in the process of economic and political reforms. These strong reformers would deserve special attention because they would be the countries in which development assistance would have the best chances to have a positive impact on economic growth (Burnside, Dollar, 1997). Moreover, giving more support to strong reformers, and being able to achieve positive outcomes in these countries, would create positive incentives for other countries to implement more reforms. It is therefore expected that the initial success of current strong reformers would create a snowball effect at the regional level and eventually stimulate the take-off of a significant number of African countries around 2015. The very fact of a strong resumption of growth in several sub-Saharan African countries that has been observed in recent years suggests that such a betting on the 1 success of the current reformers can be won. However, targeting countries according to merit will not by itself provide sufficient incentives to African governments, unless the bilateral donors co-ordinate their efforts in this respect. Most donors agree that aid should be targeted to countries, which deserve it more. It is also widely accepted that the prerequisites are a sound macro-economic policy record, perseverance in carrying out economic reform, as well as improved governance and political opening. Even though it is inevitable that each bilateral donor decides its own geographical focus for development assistance, some harmonisation of policies vis-a-vis the deserving recipients could usefully be attempted. This project aims at helping donors to identify and monitor the countries in which the DAC strategy could be implemented first. Such an exercise requires looking at macro- economic stability, economic liberalisation and opening to trade and investment, as well as governance, with a view to assess the performances of various African countries considered as more or less “emerging” with respect to these criteria. The expected initial outcome is an analysis of the current achievements and of the policy reform challenges faced by “emerging” African countries. Recent research has demonstrated quite convincingly that the growth shortfall of Africa can, to a large extent, be attributed to economic policy failures and to a week institutional environment that fails to support the operation of market mechanisms (Sachs, Warner, 1997). Implementation of better policies would certainly have contributed to a stronger growth performance. Therefore, the main thrust of the analysis will be on assessing the contribution of economic policies to the observed take off in emerging countries, as well as on the possible obstacles to further economic policy reform which is needed to ensure sustained growth in the medium run.” This study aims to answer these questions for the case of Tanzania. The other countries selected are Côte d’Ivoire, Congo D.R., Ghana, Uganda, and Mali. It is hoped that it will be possible to draw some more general conclusions by comparing the results of these country studies. It is noted by the OECD that “All of the countries selected (with the exception of Congo) had a successful growth performance over the last few years and a reasonably satisfactory record of economic and political reform. However, African countries have a distinctive record of reversal of economic policy reforms. This raised doubts about the sustainability of reform programs and has considerably reduced their credibility. As a consequence, many of economic policy reforms that have been reasonably effective elsewhere (especially trade reform), have failed to provide the expected results in the case of Africa.