World Bank Tanzania relations, 1961-1987 (Vol. 1 of 2) : Overview

Report No. 8329 Tanzania World Bank/Tanzania Relations, 1961-1987 (in Two Volumes) Volume 1: Overview january 16, 1990 Operations Evaluation Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official d6ties. Its contents may not otherwise be disclosed without World Bank authorization. W ACRONYMS BIS - Basic Industry Strategy CDC - Commonwealth Development Corporation CPP - Country Program Paper DEG - Deutsche Finanzierungsgeselleshaft Fuer Beteiligungen in Entwicklngslanden GmbH (Germany Finance Company for Investments in Developing Countries) DFC - Development Finance*Company EACM - East Africa Common Market EIB - European Investment Bank ERP - Economic Recovery Program FHO - Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.Y. (Netherlands Finance Company for Developing Countries) ILO - International Labor Office KF - Kuwait Fund MIS - Management Information Systems NDC - National Development Corporation NIC - Nordic Investment Bank PCR - Project Completion Report PPAR - Project Performance Audit Report PR - President's Report SAP - Structural Adjustment Program SAR - Staff Appraisal Report SIDA - Swedish International Development Authority SSI - Small Scale Industry TAC - Tanzania Audit Corporation TANU - Tanganyika African National Union (the Party) TDFL - Tanganyika Development Finance Company. Ltd. TEXCO - National Textile Corporation TIB - Tanzania Investment Bank TISCO - Tanzania Industrial Studies and Consulting Organization THE WORLD 8ANK FOR OFFICIAL USE ONLY Washington. D.C 20433 USA Offee of Darector-General Operatinm Ivaluastron January 16, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: TANZANIA - World Bank/Tanzania Relations, 1961-1987 Attached, for information, is a copy of a report entitled "Tanzania - World Bank/Tanzania Relations, 1961-1987" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TANZANIA WORLD BANKATANANIA RELATIONS. 1961-1987 K' TAR. -OF CONTENTS Pate No. Preface .......................................................... c Summary and Recommendations ...................................... 11 I. INTRODUCTION ............................................ 1 Purpose of Review ............................ .......... 1 II. TANZANIA'S DEVELOPMENT STRATEGY AND ECONOMIC PERFORMANCE ................................ 3 From the Achievement of Independence (1961) to thie Arusha Declaration (1967) ..................... 3 Economic Performance 1961-67 ............................ 4 Tanzania's Development Strategy - Arusha and Its Aftermath .................................... 5 Economic Performance - 1967 to 1973 ..................... 7 A Period of Increasing Structural Strains: 1973-78 ..... 8 A Period of Crises: 1979-1985 .......................... 9 Policy Re-Orientation.................................... 10- The Economy Since 1985 ................................ 10 Some Comments on Tanzania's Strategy .................... 11 III. EXTERNAL ASSISTANCE AND AID COORDINATION ................ 13 Review of External Assistance and its Coordination ...... 13 Implications of External Assistance for Bank's Role ..... 17 The Role of the Bank in Aid Coordination ................ 17 Evaluation of the Bank's Role ........................... 19 IV. BANK STRATEGY FOR TANZANIA .............................. 20 Introduction ............................................ 20 Bank's Role and Development Strategy..................... 21 Evolution of Bank Strategy for Tanzania ................. 24 The First Ten Years ................................... 24 The Next Ten Years .................................... 26 After 1981 ............................................ 31 Analysis of Bank Strategy ............................... 33 The Process of Strategy Determination ................... 36 V. BANK/TANZANIA RELATIONS - EVOLUTION AND ANALYSIS ........ 38 The Era of Good Feeling ................................. 39 A Period of Distancin *********..*****************4**** 41 Mutual Confidence Renewed, 1981 - Present ............... 44 The Current Status of Relations ......................... 46 Analysis of Bank/Tanzania Relations ..................... 47 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriation. TABLE OF CONTENTS (continued) Page No. VI. BANK'S ECONOMIC AND SECTOR WORK ......................... 50 Introduction ............................................ 50 Sector Work ............................................. 50 Bank's Work on Industrialization ...................... 50 Bank Work in Agriculture .............................. 53 Bank Work on Parastatals ................................ 55 Macroeconomic Work ...................................... 57 The 1977 Liberalization Episode ..................... 58 World Bank-IMF Cooperation .............................. 59 The Bank's Economic Forecasts .......................... 61 Forecast !or 1966-1970 ................................ 61 Forecast for the Second Five Year Plan Period (1968-1973) ............................. 61 The 1977 BER Forecast for the 1975-80 and 1980-90 ..... 64 1981 and 1984 Projections ............................. 65 Conclusions ........................................... 66 Evaluation of Bank ESW .................................. 66 VIT. THE POLICY DIALOGUE ..................................... 68 Development Strategy .................................... 69 Public Investment Plans ................................. 75 The Aftermath of the 1974/75 Crisis ..................... 77 Structural Adjustment 1980-86............................ 79 Issues Not Discussed..................................... 85 Management of the Dialogue............................... 87 Link Between Dialogue and Lending - The Issue of Leverage 96 Other Lessons............................................ 97 VIII. THE LENDING PROGRAM ..................................... 99 Evolution ............................................... 99 1. Size ................................................. 99 2. Composition .......................................... 102 2.1 Sectoral Distribution ............................ 103 2.2 Project-Based/Policy-Based Lending ............... 107 2.3 IBRD/IDA Blend ................................... 108 3. Cofinancing .......................................... 108 Evaluation .............................................. 110 1. Size of the Lending Program .......................... 110 2. Composition .......................................... 113 3. Effectiveness ........................................ 114 3.1 Project Level .................................... 115 3.1.1 Reasons for Poor Performance.................... 117 3.1.2 Other Issues ................................... 121 3.2 Non-Project Lending .............................. 123 4. Conditionality........................................ 126 Summary Analysis on Review of Lending.................... 127 ANNEX ............................................................ 131 FIGUP ES.......................................................... 139 MAP - - L WORLD BANKITANZANIA RELATIONS, 1961-1987 'REFACE This study the fourth of a new series of country studies initiated in 1985. The first two reviewed the World Bank's relationship with Pakistan (Report No. 6048) and with Sri Lanka (Report No. 6074); and were issued to the Executive Directors and the President during 1986. The third, reviewed the relationship with Senegal, and was presented to the Executive Directors and the President in 1989. The purpose of this series of reviews is to look at the interaction between the Bank and selected borrowing countries over an extended period of time. Taken singly each study should help the Bank identify the lessons which could serve to make the Bank/Country relationship more fruitful in the future. Together the several studies should provide a basis for comparative analysis to identify needed improvements in the way the Bank provides development assistance. The study of the Bank/Tanzania relationship covers the period from the day Tanzania joined the Bank in 1961 until structural adjustment operations were effectively initiated at the end of 1986. Part I contains an overview of the relationship taking as its point of departure a review of Tanzania's development strategy, and focussing on Bank strategy as reflected in the economic and sector work, the policy dialogue, and the lending program. General conclusions and recommendations are included in this part. Part II contains detailed analyses of sectoral relations, and includes conclusions and recommendations relevant to each sector. The study is based on a review of World Bank files and audit reports, on discussions with Bank staff and experts who have studied the country, and on information collected during field missions. The kind cooperation and valuable assistance of Government officials and of representatives of the private sector, the academic community and donor agencies in Tanzania are gratefully acknowledged. TANZANIA WORLD BANK/TANZANIA RELATIONS. 1961-1987 SUMMAKY AND RECOMMENDATIONS 1. The aim of a review of Bank/Country relations is to identify and understand the factors that have influenced the flow of resources and ad- vice from the Bank to the country, and to assess the effectiveness of that flov in assisting the country's development. The ultimate purpose of the review is to draw lessons from experience which may increase the effective- ness of future Bank activities. 2. The review of Bank/Tanzania relations is of particular interest because Tanzania's national development strategy emphasizing self-reliance, growth and equity, within a socialist framework has failed to develop a viable economy in spite of strong Bank support. The economy remains fra- gile and dependent, and has failed to achieve growth in per capita income. GNP per capita was US$240 in 1986 after an average annual growth rate of -C.3% during 1965-86. Furthermore, the country has been unable to sustain early improvements in infrastructure and social services. 3. The review is also of interest because there have been many factors favorable to growth. Investment has been over 20% of GDP on the average, partly reflecting the fact that since Independence Tanzania has received over US $ 7 billion (in constant 1983 $) in external assistance, which in most years has been the predominant source of support for the development budget. There has been a high degree of political stability, and the Government has been willing to take strong measures to further its development objectives. 4. However, the country has suffered from severe external shocks, an excessively disruptive development strategy, defective policies, and inef- ficient parastatal organizations. Since 1978 the country has been facing a severe economic crisis, and the Government as well as the Bank and the donor community, are seeking adjustments in the development strategy that would create the conditions for future progress. Tanzania's Development Strategy and Economic Performance 5. At Independence Tanzania was mainly an agricultural country, producing food for domestic use, and sisal, coffee and cotton for export. Industry was at a rudimentary stage, with cotton ginning the only important activity. The economic system was based on private enterprise with a modi- cum of government regulation, limited protec.ion from foreign competition, and with guaranteed minimum prices for major exports. 6. During 1961-67 Tanzania retained the free enterprise economy, with minimal change except that the State was given a more active role in promoting development. Agricultural development was promoted, in accor- dance with the 1961 World Bank recommendations, by "improvement" measures involving public provision of extension, marketing, and credit services, and by "transformation" measures involving the creation of pilot village settlements, to foster adoption of modern cultivation methods by the peas- antry. The scope for import substitution in manufacturing was broadened by the introduction of some restrictions on imports. Notwithstanding these changes during this period, there was a high degree of continuity in poli- cies from the past. 7. Economic growth was vigorous in the immediate post-Independence years. During 1961-67, GDP grew at over 6% per year on average, with growth of 8% per year in agricultural exports providing the main impulsi:. 8. In 1967 the Arusha Declaration heralded a shift of policies away from free enterprise toward "African Socialism". Tanzania's development strategy announced in the ruling party's Arusha Declaration of January 1967, called for a centrally planned economy and government control and operation of the "commanCing heights" of the economy, mainly in the produc- tion, distribution and finance sectors. The goals were self-reliance and equity. Self-reliance implied minimal dependence on the outside world for basic capital and consumer goods and for managerial and technical skills. This meant more complete substitution of local manufactures for imports, and more rapid Africanization of the admInistrative and technical personnel in the public sector. Agriculture was to be transformed through a massive resettlement (villagization) program and a shift from individual to commu- nal and state planned farming, with associated changes in institutions from voluntary cooperatives to parastatal bodies. Equity was to be pursued through universal primary education and health services, an incomes policy involving minimum and maximum wage,i 'lnd a system of uniform prices for the whole country. 9. In the initial stages the implementation of the Arusha strategy was gradual. Foreign companies were nationalized and owners compensated, but usually there was continuity in management. New industrial enterprises were started under the shield of a moderately protective trade regime. The villagization program was voluntary and, apparently, it created little disruption. 10. The strategy was successful in increasing literacy, enrollment in primary education, and access to basic health care, while achieving a mod- erate rate of GDP growth. Despite some inevitable dislocations caused by institutional changes, GDP growth averaged 4.3% per annum during 1967-73. However there was a marked stagnation of exports. 11. Soon, the tempo of reform quickened: in 1972 the administration was drastically decentralized; in 1973 villagization became compulsory, and its pace was greatly accelerated; and in 1975 a Basic Industry Strategy. including a component for development of heavy industry, was introduced. Pressure to Africanize management &lso increased greatly. Administrative measures supplanted the market, and there was widespread reliance on cluan- titative import controls. 12. During 1973-79 GDP growth slowed to about 2.5% per annum. This partly reflected the effects cf drought and oil price crisis in 1974-75, the break-up of the East African Community, and the war with Uganda in 1979. It a.so partly reflected the effects of domestic policies and the rapid rate of change in institutions. Although prices of primary exports almost doubled, exports fell by 40% in real terms mainly because of low producer prices. Significantly, during this period Tanzania shifted the emphasis of its development strategy from agriculture to industry. Em 13. In 1977 President Nyerere himseif reviewed the progress made since the Arusha Declaration.1 While conceding that there had been problems, he concluded that "the problems can be solved" through increased discipline, efficiency and self-reliance. The review did not consider the possibility that the overall strategy might have been flawed. 14. In retrospect it is clear that the strategy pursued in the 1970s suffered from internal inconsistencies. Economic planning, administrative decentralization, agricultural modernization, and intensive industrializa- tion all called for a rapid increase in skilled personnel. Yet the Afri- canization program led to a rapid exodus of expatriate and AAan techni- cians, administrators and businessmen. Meanwhile, the Tanzanian education- al system, which focussed on adult literacy and on the provision of univer- sal primary education, failed to supply the needed skills. The industriali- zation program, which proved very import intensive, was undertaken at a time when Tanzanian export earnings were declining; initially because pro- duction for export was disrupted by villagization and by internal price policies adverse to the farming sector, and later because export prices were falling. Departures from the market price mechanism and from conser- vative finance led to resource misallocation and to reduced efficiency. Perhaps most serious of all was that the rapid pace of change made the scarcity of managerial talent and skilled manpower an 0ven more binding constraint than it need have been, and proved to be severely disruptive of production. 15. Between 1979 and 1985 GDP growth averaged just under 1.4% per year; the foreign exchange crisis caused by the decline in prices of primary exports and the 1979 oil price increase having brought growth almost to a standstill until after 1983 Since 1985 growth has recovered to over 3% per annum, - about equal t: the rate of population growth. Although export earnings increased in 1986, real exports declined slightly. Unfortunately, with the adjustment in exchange rates price pressures are becoming more obvious. 1/ J. Nyerere: The Arusha Declaration Ten Years After; para. 51 16. The crisis of the early 1981s led to the adoption of reforms aiied at economic revival even at the cost of some departures from the Arusha principles. A 1982 Structural Adjustment Program involving some moves to libarallze distribution and marketing, was followed during 1984 by a serls of reforms aimed at restoring fiscal and external balance, and at further rationalizing production and distribution. In 1986, the Government intro- duced an Economic Recovery Program, designed in cooperation with the Bank and the IMF. It involved price feform favoring agriculture, the abolition of a state grain purchasing monopoly, and other measures relaxing internal controls. On the macro-economic side, there was movement to restore fiscal balance and to bring the exchange rate to equilibrium level, thus permit- ting the gradual relaxation of import controls. A consensus in favor of fundamental reform of the economic system is still in the process of con- solidation; but structural adjustment is continuing. Bank/Tanzania Relations History 17. Until 1967 Tanzania's approach to development essentially followed that outlined by the Bank in the 1961 economic report, which stressed the expansion of the government-regulated private enterprise economy and the gradual transformation and integration of the traditional rural sector into it. After the Arusha Declaration which reoriented Tanzania's national *,- 0-lopment strategy toward the creation of a self-reliant, indigenous :.rican socialist state, the Bank continued to support Tanzania's develop- ment effort. There were some in the Bank who voiced misgivings and criti- cisms, but their views did not prevail in determining official Bank pos- ture. 18. The Bank's attitude may have been due to the fact that some elements of Tanzania's approach seem to have been built on earlier suggestions made by the Bank, e.g. villagization, and the expanded role for the public sector. It may also have been due to the fact that the precise operational implications of the Arusha approach emerged only slowly, and the Bank's wait and see attitude delayed a critical evaluation. There is reason to believe that Tanzania's direct concern with the problem of poverty and the high priority it gave to the provision of health, education and water to rural peasants, may have influenced Bank thinking regarding African development. Whatever may have been the reason, it is clear that the Bank found the Tanzania approach to be in line with its own thinking on development priorities in the early seventies. and was willing to support with a rapidly expanding lending program an approach it knew was largely experimental. 19. The Bank's support to Tanzania in the early seventies also very probably reflects strong pressures to lend. The targets for lending to Africa had increased several-fold between 1968 and 1977, but many of the countries of the region were not good candidates for Bank lending because of political instability or clearly unacceptable policies. By contrast, VL * Tanzania with its stable governm.nt and commitment to growth and equity was a prime candidate for loans. Although there were indications that Tan- zania's absorptive capacity for lending was limited, it was assumed that this capacity could be increased through technical assistance. 20. The economic crisis of 1974/75 resulting from the first OPEC oil price increase and from a prolonged drought prompted the Bank to examine the adequacy and ;ulnerability of Tanzania's strategy. In the Basic Economic Memorandum of 1977 the Bank presented a comprehensive evaluation of the approach and recommended significant changes, including reduction in the level of public sector development expendituxes and improvement in incentives to export. Bank strategy then shifted to procure greater lever- age over Tanzanian policy decisions. One way of achieving this was through the conditionality attached to program lending; the Bank succeeded in get- ting Tanzania to liberalize imports through its Program Credit of 1977. Another way was to increase or at least maintain Bank share in external financing. In face of rising levels of support by other donors this im- plied increased lending. 21. By the end of the decade the Bank became convinced that the in- creasingly poor performance of the economy, although partly due to exoge- nous shocks, was mainly the result of inappropriate economic policies. Tanzania's official view was that poor economic performance was due to the exogenous shocks--a t3mporary stabilization problem, which could be solved through a large injection of foreign resources. The Bank saw the solution as requiring stabilization through the restraint of aggregate demand, and, even more important, structural change involving the reduction of the bias against exports, the elimination of the heavy burden of inefficiency re- sulting from the centrally planned and public sector-led approach involving a plethora of parastatal organizations, and the reinstatement of agricul- ture as the leading sector. In response to Tanzania's request for a pro- gram loan in 1979 the Bank insisted that fundamental changes in policies be made. This was the background against which the President of the Bank went to Tanzania in January 1980 to discuss with President Nyerere the need for adjustments on the part of all developing countries which had been serious- ly affected by the recent changes in the international economy. 22. Early in 1981 the Bank, recognizing that Tanzania was unable to design an adequate package of adjustment measures and may have not been willing to accept the Bank's diagnosis and advice, proposed to provide a team of independent experts knowledgeable about, and acceptable to, Tanzania to help it develop its own program of adjustment measures. Tanzania accepted the proposal and the team was assembled in Dar es Salaam in August 1981. The report of this Tanzania Advisory Group submitted to the Government in April 1982 essentially corroborated Bank views on needed adjustment. 23. Meanwhile, the Bank tried to press for policy changes by attaching to the Export Rehabilitation Credit of mid-1981 many conditions involving micro and macro measures. When Tanzania failed to fulfill those conditions which remained after the credit became effective, the Bank discontinued further processing of the already negotiated Mata rural development proj- ect, and drastically reduced its lending program to Tanzania. Bank/Tanza- nia relations approached total estrangement. This was further exacerbated by the need to suspend disbursement due to arrears in service payments to the Bank during the first half of 1982. 24. Relations improved teEnoorarily when Tanzania reacted positively to the report of the TAG, and attempted to put together a structural adjustment program. They continued to improve as Tanzania saowed willingness to consider the recommendations of the missions preparing the Agricultural Sector Report(1983) and the CEM (1984). However, in 1983 when Tanzania failed to reach agreement with the IMF on stabilization matters, the P?nk again suspended lending. Subsequently, in 1984-85 Tanzania took significant measures (including a 35% devqluation and 40-60% increase in agricultural producer prices); and the Bank approved the large Multi-Sector Rehabilitation Credit after Tanzania reached agreement with the Fund in 1986. A study of the industrial sector was undertaken jointly by the Bank and Tanzania in 1987, layirg the basis for the Industrial Rehabilitation and Trade Adjustment Program credit in 1988. A study of parastatals to form the basis of a reform program was also undertaken jointly during 1987/88. Thus a pha.e of mature interchange evolved out of a period of confrontation and near breakdown in relations. Analysis 25. Bank strategy changed over time in two directions. Firstly, the Bank moved from a position of uncritical support to one of insistence on adjustments in policies and institutions. The move was due partly to a change in the Bank's view of its role in development giving greater empha- sis to support for adjustment in the policy and institutional framework, and partly to the change in its assessment of the appropri&teness of Tan- zania's policies, institutions, and national economic management. Second- ly, after years of increasing lending to support an approach it was ini- tially satisfied with, but later had serious misgivings about, the Bank severely reduced and for a while suspended lending to enhance its leverage in the policy area. In any event after 1980, with difficulties in replen- ishment of IDA and with improved eligibility of U.;anda, Kenya and Malawi, the availability of resources for lending to Tanzania was severely cur- tailed. 26. In retrospect, Bank/Tanzania relations appear to have been determined by the degree of convergence of views on development, by the availability of alternative sources of advice and financing to Tanzania, by the Bank's changing view of its role in development, and by the extent to which Bank staff felt pressured to lend. These factors determined the core transaction in lending and advice around which Bank/Country relations revolved. There have been three main phases in these relations: (i) a phase of apparent convergence of views on development strategy--"the era of good feeling" lasting from 1961 to 1976/77; (ii) a phase of divergence of views--"a period oi distancing" lasting from 1977/78 to 1983; and (iii) a phase of maturity--"mutual confidence renewed" beginning with the Budget of June 1984. 27. The change in the availability of other sources of financing appears to have been an important influence on Bank/Tanzania relations. Other donor support grew throughout the seventies, at first gradually then rapidly between 1976 and 1980, then declined. This suppo:t may have been regarded as substitutable for Bank lending in the late seventies, and, to the extent that it was expected to continue to grow, may have been a factor in Tanzania's initial reluctance to accept the need for structural adjust- ment. Another important influence, may have been the decline in Tanzania's confidence in Bank advice after the liberalization of imports urged by the Bank in 1977 resulted in depletion of reserves, which the Bank declined to help replenish through a program loan. 28. From the Bank's point of view the extent to which it was willing to lend to and advise Tanzania depended on the availability of resources to lend to the Region, the demands for bank financing to other member coun- tries of the Region, the Bank's degree of satisfaction with Tanzania's development strategy and manageme : of its economy, and the Bank's view of its absorptive capacity. Relative emphasis on advice versus lending de- pended mainly on the Bank's perception of its role in development and on its satisfaction with Tanzania's strategy and policies. Earlier in the phase of convergence of views the Bank saw its role in development as pri- marily that of lending for projects, with advice being essentially project related. After the first oil crisis the Bank increasingly evolved a role in stabilization and later in structural adjustment. This change was in the direction of greater emphasis on advice in the core transaction. This emphasis became especially pronounced around 1980, when the Bank formally launched its structural adjustment lending. 29. The coincidence of convergence of views, pressures to lend, and low level of other donor support, given the over-optimism about absorptive capacity by both sides, seem to explain the rapid expansion in Bank support in the early seventies. The pressure to lend probably explains why views critical of Tanzania's strategy were not allowed to influence the dialogue until the economic crisis of 1974, and did not really prevail until the pressure to lend abated at the beginning of the eighties. Increasing lend- ing early during the phase of divergence reflects the combined impact of pressure to lend and the use of lending as leverage to get a client with increasing access to alternative sources at the time, to ancept advice. Reduced lending by the Bank after 1980 was an effective "lever" for getting Tanzania to initiate structural adjustments mainly because alternative sources were reduced. The more active aid mobilization role of the Bank after 1983 served to link other sources with the Bank, and increased poten- tial Bank leverage in policy matters, more so because there was general agreement among donors on the failure of Tanzanian policies. - ix - 30. The failure of the Bank to get Tanzania to undertake prompt reform, even when the Bank's ability to use leverage must have been at a maximum, was due partly to the absence of a political consensus in favor of reform within Tanzania and partly to the fact that Tanzania was lacking in the ability to design and undertake policy reform. The Bank's appreciation of the delicacy of the political situation and its effort to help Tanzania improve its policy reform capability, have been the hallmarks of the phase of maturity in recent relations. Evaluation of Bank Work on Tanzania Bank Econonic and Sector Work 31. Guided by the fact that Tanzania's strategy and Bank lending U coincided in giving high priority to the productive sectors in the early seventies and to the problems of stability and macro-economic management in the eighties, the review of the Bank's economic and sector work (ESW) focusses on industry and agriculture, and on macro-economic analysis including forecasts. The ESW is evaluated on its inherent quality and its impact; quality determined by whether it identified and subjected to realistic analysis the issues of importance in the country's development and suggested appropriate measures, and impact determined by whether Bank lending and policy dialogue and in turn Tanzanian policies and investment program were influenced by it. 32. Bank ESW was fairly consistent in raising issues concerning the policy framework in the productive sectors. In agriculture 'he 1974 and 1983 sector studies pointed out that pricing problems-low producer prices and uniform national pricing, and the inefficiency of the parastatal insti- tutions were undermining GDP growth and the expansion of exports. In in- dustry, studies done as early as 1971 and as late as 1987 raised the issue of excessive protection, suggesting that inefficient industries with lim- ited export potential were the result. The 1977 Basic Economic Report contained a critical analysis of the "basic industry strategy" and demon- strated that the sacrifice in terms of GDP growth over the longer term would be substantial. The 1987 study called in question the soundness of the industrialization strategy by pointing out that even in the absence of a foreign exchange constraint only a small percentage of the industrial enterprises could be economically viable in the long run. Parastatals were found to be over-represented in the non-viable group. 33. In retrospect, it is clear that earlier Bank studies had not given I sufficient attention to Tanzania's overall development strategy and to the implications of its internal contradictions for the performance of indivi- dual sectors. Two important component .:apid villagization and decentrali- zation of administration were not subject to careful and timely study, with the result that their negative impact on agriculture was not foreseen by the Bank until the economic crisis and near famine of 1974. Similarly, the crucial dependence of massive import-substitutiou industry on the export earnings of agriculture was not sufficiently appreciater., and the Bank too readily accepted and was prepared to support the shift to industry as the - x - leading sector. However, it is fair to say that the Bank adjusted its position quickly, calling for a slowdown in villagization and decentraliza- tion after the mid-seventies and for recognition of agriculture as the leading sector in the early eighties. 34. Bank ESW was late in giving attention to Tanzania's investment program. The Bank was invited to appraise Tanzania's early plans (e.g. 1969-74 Plan), but while agreeing with the overall goals , the Bank limited its analysis to the matching of investment targets with resource availabil- ity, and concluded that the targets were realistic without analyzing the strategy as a whole and the appropriateness of the investment program. Even the 1977 Basic Economic Report which raised the issue of financial and manpower over-commitment did not comment on the sectoral mix of expendi- tures within the investment program, particularly the balance between in- frastructure and productive sector investments. With the shift of Bank lending toward structural ad'4stment in the early eighties, and with the focus on the investment program in consultative group deliberations this earlier neglect has been reversed. 35. Macro-economic work was started in the early seventies when the Bank did "resource gap" calculations in order to determine the requirements for external financing. However, scant attention was paid to the link between policies and the gap. After 1974/75 fiscal and foreign exchange problems received more extensive treatment; but even the 1977 BER, which threw light on the linkage between real and expenditure variables, virtually ignored monetary and foreign exchange policy. The lack of attention to monetary issues (specifically the extent to which the Central Bank was financing the fiscal gap) may have been at the root of the ill- fated liberalization episode of 1977, when Tanzania liberalized imports in response to Bank conditionality (Program Credit of 1977) and lost nearly all its reserves in less than a year. Lack of macro-economic analysis was also partly responsible for the inability of the Bank to provide guidance to Tanzania in 1980 regarding measures it would have to take in order to get a program loan. This failing was partly due to Bank dependence on I14F macro-work in the seventies. Since the early eighties Bank staff have been giving increased attention to macro-economics, complementing the work of the Fund and providing a basis for a more meaningful dialogue between the two organizations regarding Tanzania's stabilization and adjustment requir- ements. 36. With the notable exception of the pathbreaking Economic Report of 1961 Bank ESW had limited impact on Bank lending and policy dialogue before 1980. This may have been due partly to the fact that many of the important studies in the seventies, e.g. the 1974 Agriculture Sector Memorandum and the 1977 BER were equivocal in their conclusions, leaving the way open for lending while criticizing the policy framework. Also, it may have been due partly, as in the case of agriculture, to unresolved differences of opinion between projects and programs and between the staff of the Regional Missior to East Africa and of headquarters. Bank ESW seemed to have been mostly or the defensive in the seventies. Apparently, the fragility of the data bas- - xi on which most studies had to be done, limited experience in African devel- opment and the uniqueness of the Tanzanian experiment, provided opportunity for attacking and rejecting the findings of ESW, thereby minimizing its power to counteract the strong pro-lending bias in Bank strategy. At the same time too little Bank effort was directed at improving the data base, which is to an extent still unsatisfactory. The conclusion to which one comes is that, regrettably, Bank performance in Tanzania during this period could have benefitted from greater attention to the ESW actually done, as well as from better economic work in some cases. 37. Since 1980 Bank ESW has had considerably greater effect on Bank/Tanzania relations, both lending and the policy dialogue, than hereto- fore. Partly this has been due to the increased importance of policy based lending in the Bank, and partly this has been due to a willingness to crit- ically re-examine Tanzania's sector strategies in light of the fragility of its development and poor economic performance over the last decade. This enhanced role of ESW makes it important to assess the need to improve the scope and quality of "development intelligence" and the integrity of the process through which it impacts on the Bank's product. Further on in this summary some lessons and recommendations for ESW are suggested. The Policy Dialogue 38. During the first fifteen years of Tanzania's indepencence the significant policy initiatives were villagization, nationalization, and decentralization. One would have expected discussion of the impact of these policies on development, but the limitation of the Bank's interest to its lending program caused it to lose the opportunity to influence and/or learn from the Tanzanian approach. Also the Bank did not take advantage of opportunities to discuss Tanzania's investment program and apparently never quite viewed its own lending program within that context. 39. Despite having originally recommended a more cautious approach involving pilot projects for the village suttlement scheme out of which villagization had evolved, the Bank did not question the economic merit of Tanzania's radical villagization program. In fact, the Bank did not raise villagization as an issue in Tanzania's development until 1975, when it was clearly causing the slowdown of Bank-financed agricultural projects. Indi- cations are that the Bank saw the creation of ujamaa villages as a politi- cal rather than economic measure and therefore inappropriate for Bank/Tan- zania dialogue, and that the Bank tended to accept the overly optimistic views of officials as to the likely impact on develo-ment. Given the mini- mal and delayed dialogue on this important component of Tanzania's strat- egy, the Bank failed to influence the pace and content of the program and to learn as much as it could from a unique experiment in rural development. 40. Bank reaction to Tanzania's policy of nationalization of private firms following the Arusha Declaration in 1967 was to immediately seek assurances that nationalization was a once only measure and that adequate compensation would be paid. The Bank continued to monitor Government ac- quisition of private property; took note of the 1970 Rental Properties Acquisition Act; and warned Tanzania on the likely impact on investment and on the migration of Asians. The Bank also delayed the Smallholder Tea Project, largely in response to a UK complaint about treatment of British subjects under the Act. Although it is impossible to claim that the ab- sence of further nationalization was due to Bank action, the Bank's swift, unambiguous and sustained reaction could well have been a factor in Tanza- nia's decision not to continue its use. 41. Fearing the depletion of Tanzania's central administrative capacity as a result of the 1972 decision to decentralize public administration, the Bank dispatched a mission to study the development implications. Within months the Bank's fears were confirmed by the emergence of manpower bottlenecks obstructing project preparation and implementation. The ensuing discussions with the Government regarding decentralization revolved around the impact on Bank lending rather than on development generally. In the crisis of 1974 the focus shifted to the budgetary impact of decentralization; a Bank study concluding that the blend of decentralized spending decisions and centralized revenue raising presented a danger of exploding budgetary imbalances. Once this crisis subsided, Bank concern over decentralization was once more dictated by its implications for the lending program. Given this rather limited Bank interest in the topic, there was never an effective dialogue over decentralization as development policy. It appears that the Bank wished to avoid a discussion that could be confrontational, with possible damage to lending prospects. 42. Tanzania's repeated requests for Bank assistance in public investment planning during 1961-71 provided many opportunities for discussion of the principal vehicle for government intervention in development. The Bank did not take advantage of these opportunities for developing a continuing dialogue. In the early seventies the Bank seems to have been reluctant to be involved continuously in what appeared to be technical assistance and to expose itself to blame for fiscal burdens. In 1976 a Bank study of the cost implications of social development targets, and in 1977 the identification of the issue of financial and manpower overcommitment by the mission preparing the BER, again provided the opportunity for Bank/Tanzania dialogue on this matter. However this did not develop, and as late as 1981 the Bank view was that it would be no small achievement to get the Tanzanians to agree that the Bank could make a useful input in their planning process. Since 1982 the public investment program has been discussed within the context of periodic interchanges on structural adjutment. 43. The dialogue on public investment planning has been less useful than it could have been, initially because of lack of continuity due partly to Bank reluctance to be involved or to take the initiative in suggesting discussions. More recently, the discussion has focussed on the level of public sector investment consistent with overall macroeconomic balance, with less attention to the relationship between the Bank's lending program and the public investment program. Tanzanian officials complain that the Bank's participation seems constrained by the wish to avoid revealing the - xiii - exact size and content of its intended lending program, apparently in order to retain Bank flexibility. 44. Bank/Tanzania discussions after 1974 and for the remainder of the seventies, occurring mainly in the context of economic crises, centered on the balance of payments gap and on needed stabilization measures and ad- justments in development strategy. Initially Tanzania sought, received, and accepted Bank advice on an appropriate response to the oil crisis in 1974, taking many difficult fiscal, monetary and incomes policy measures to stabilize its economy. This favorably impressed the donor community, and was followed by an intensified dialogue with the Bank and Fund leading to a Bank Program Loan and later to a Program Credit. With the resurgence of balance of payments problems after 1978, Tanzania, convinced that the causes were external and short-term, sought to reopen the dialogue on sta- bilization in the hope of getting another program loan. The Bank took the position that, however important external causes might have been, defective internal policies and institutional weakness were important contributory causes. This basic disagreement, Tanzania's belief that faulty Bank advice was partly responsible for the loss of reserves after 1977, and the Bank's reluctance to consider program support without an IMF/Tanzania standby agreement led to considerable deterioration in Bank/Tanzania communication over policy matters. Structural Adjustment--1980-86 45. A new phase in Bank/Tanzania policy discussions focussing on structural adjustment was initiated at the highest level by Bank President McNamara when he visited Tanzania in January 1980. He said that the Bank was considering a new form of assistance- -structural adjustment loans (SAL), which would be quick disbursing and supportive of a program of ad- justment measures by recipient countries. For Tanzania the Bank was pre- pared to consider a SAL in several installments over the next five years, and to work closely with the Treasury in designing the required adjust- ments. 46. Tanzania's request for structural adjustment assistance submitted later that year did not adequately address the measures needed to sustain growth. It was agreed that it could opt for a less than full structural adjustment operation and that the Bank would help in the design of a suit- able program. These two aspects of the agreement led to almost opposing developments in the dialogue. Conditionality attached to the lending oper- ation (the Export Rehabilitation Credit approved in April 1981) and cur- tailment of the lending program when Tanzania failed to meet some of the conditions created immense difficulty in the dialogue, as the Bank was perceived as trying to "lever" the client into taking adjustment measures before there was genuine agreement on the measures needed. This led to disenchantment within the Tanzanian power structure, with the Party putting forward its own "economic survival plan", which the Bank regarded as opti- mistic in its assumptions regarding the expansion of exports and the ease with which the foreign exchange constraint could be relaxed. The Bank offered to help in the design of a suitable program by providing a Tanzania Advisory Group (TAG) comprised of three economists acceptable to Tanzania. The TAG report, completed in April 1982, provided a realistic alternative to the Party's survival plan, and became the basis of the Government's structural adjustment program (SAP). The SAP was submitted to the Bank in July 1982, and provided the basis for a revitalized dialogue on structural adjustment for the next two -ears. 47. At the presentation of the Budget in mid-1984 the Government an- nounced important measures which later formed the core of its Economic Recovery Program (ERC). This signal of willingness to make policy adjust- ments was met by a more positive attitude within the Bank involving a deci- sion to help Tanzania in meeting the infotnation needs for negotiation with the Fund. Then in July 1985 came an impo tant breakthrough in the struc- tural adjustment dialogue. The Bank proposed alternative scenarios for country adjustment policies ..nd Bank support. Tanzania opted for the more demanding package and requested Bank help in preparation of the program. In 1986 this program formed the basis for agreement with the Fund, for the Bank's Multi-Sector Rehabilitation Credit, and for substantial support by other donors. Issues Not Discussed 48. One issue of importance in Tanzania's development which the Bank avoided was population growth. Tanzania doubled its population during 1966-86, when the Bank was expressing concern over the constraining influ- ence of population growth on economic performance in Sub-Saharan Africa. Although Tanzania has avoided making statements on population policy it has not been unwilling to discuss population matters, and has been involved in a low-key interchange with the UNDP. In 1986, a conference of the Party's National Executive Committee was devoted to population issues. 49. Bank failure to discuss population issues may have been due to the unlikelihood of lending operations given the willingness of other donors to provide cheaper support in this area. This possibly explains why the Bank's sector work has all but ignored the need to develop the data and analytical base for dialogue. However, spatial distribution of population has been and will continue to be a vital factor in Tanzania's development strategy; and size will become increasingly important. The Bank cannot continue to ignore population issues, for the decision whether or not to discuss a subject must turn on its importance to the country's development and not on whether a lending operation is in the offing. Management of the Dialogue 50. There were certain weaknesses in Bank planning for and execution of discussions. Some examples of theve are given below: - xv - (i) Tt Bank failed to take the initiative on many occasions in the seventies on matters of importance, where it could have made a contribution to a debate, and for where it could have learnt from the client's experience. Very likely this was due to the Bank's perception of its role as emphasizing project financing relative to advice and technical assistance. (ii) Review of the dialogue on structural adjustment suggests that the Bank was frequently not clear whether the objective was to advise, i.e. transfer information, or to negotiate, i.e. get Tanzania to agree to certain measures. On occasion the Bank wanted Tanzania to take measures before the Bank itself had done the necessary tech- nical work to be able to advise the country and before Tanzania had time to understand the options. The appropriate sequence would have been to jointly explore options, then to advise, and to negotiate later. (iii) With so many different advisors to Tanzania, conflicts between prescriptions were inevitable. The Bank needed to open, maintain, and use a line of communication with the important sources of advice. This was not done effectively in the case of the ILO, and for a time with the Fund. Later Bank/Fund collaboration improved, thereby eliminating one source of confusion toL the Tanzanians. (iv) The conduct of the dialogue has not been carefully planned. The make-up of the agenda for meetings, the level at which certain issues were raised, coordination among within-Bank sources of advice, and technical preparation have drawn unfavorable comment fror the client, and were apparently not approached by the Bank in a manner conducive to achievement of desired outcomes. 51. The manner in which advice was given raises questions regarding Bank (i) attitudes, (ii) credibility, and (iii) realism. (i) Tanzanians have regarded as offensive the attitude of some Bank staff suggestive of infallibility of the Bank's policy prescrip- tions. Apparently, Bank staff were not always willing to give respectful consideration to the client's views; and by not giving the impression of willingness to listen may have denied themselves the freedom to raise sensitive issues the Bank may have wanted to discuss. (ii) By failing to be forthright the Bank at times suffered from a lack of credibility in its communications with Tanzania. An example is the interchange over the linkage between Bank and Fund programs and conditionality, which sent confusing signals to the Tanzani- ans, and may have contributed to the delay in reaching agreement. (iii) The discussion on structural adjustment clearly showed the impor- tance of being realistic about what was feasible within the con- straints on Tanzania's willingness and ability to undertake policy reform. The Bank was late in developing an appreciation of the political, cultural, and administrative factors which impinge on the policy decision and implementation processes; and was there- fore frequently unrealistic in its expectations regarding Tanzani- an responsiveness to its advice. Dialogtue/Lending Link 52. While it is necessary to link dialogue and lending to ensure that the policy environment complements investment, the Bank has used lending as a source of leverage in policy discussions. In the SAL discussions of the early eighties, the effort to force the pace of agreement on measures, before the Tanzanians understood them and were politically ready to intro- duce them, caused confusion and uncertainty regarding the Bank's inten- tions. Given the long-term nature of Bank/country relations the Bank can adopt a number of strategies which would give the country more flexibility and sometimes more time (e.g. committing difficult issues to further study, appropriate tranching of disbursement of SALs) instead of using maximum pressure to get immediate up-front policy action. 53. Notwithstanding the lack of planning and the flaws in execution, the Bank/Tanzania dialogue did benefit from Bank willingness to adopt an innovative approach to relations. The use of the TAG in 1981 avoided the certain rejection of solutions which may have appeared doctrinaire had they come from the Bank rather than from independent third party experts. Also, as Bank staff gradually became more sensitive to the political process behind policy reform, they became more aware of the merit of assistance to help officials examine policy options and design changes. Perhaps the most helpful to the dialogue and to the restoration of Tanzania's confidence in the Bank was the Bank's willingness to formulate an independent position on macroeconomic adjustments and to engage the Fund in a dialogue on appropri- ate measures for Tanzania. Bank Lending to Tanzania 54. Bank lending commitments to Tanzania during 1961-87 amounted to nearly US$ 1.5 billion. Tanzania's share of disbursements to low income Africa varied between 9 and 13 percent during 1970-86, while having about 8.5% of the population. Bank disbursements in relation to GNP varied from an average of 0.7% in 1970-74 to 1.5% during 1974-86. Most lending was for the support of projects--about 81%, while non-project financing accounted for the remainder. Agriculture/rural, industry, infrastructure, and energy were the main recipients of project support, accounting for 21%, 17%, 18%, and 16% respectively. Project Lending 55. Based on the criteria--economic rate of return (ERR), achievement of physical targets, capacity utilization, financial viability, and delays in project completion, the record of effectiveness of project lending has not been good. The experience in various sectors may be summarized as follows: (a) In the Agri/rural sector, of 23 operations 17 have been eval- uated. Of these, 12 had negative re-estimated ERR, and 4 had ERR substantially below the estimate at appraisal. The out- standing example is the Cashewnut Development Project with re-estimated ERR being negative compared with an appraisal ERR of 39%; with processing capacity reaching a level three times that of cashewnut production; and with four out of five project factories standing idle within four years after appraisal of the follow-on operation. (b) In direct lending to Industry re-estimated ERR available for 2 (both textile) of the 4 projects were negative, partly reflecting low capacity utilization of 10% and 28%. Capacity -4tilization in the other two, leather products and pulp/pa- per, was 4% and 49% respectively. MIssive financial losses of the operating enterprises resulted. (c) In Infrastructure, of 10 transport projects financed, re- estimated ERR are available for 6, and of these 5 are sub- stantially below ERR estimated at appraisal. Operations in Telecommunications, Energy and Power, and Water Supply and Sanitation were generally successful though significant de- lays in completion were experienced. (d) In the Social sectors results were mixed. Of 7 Education projects 6 have been reviewed; and of these only the first and sixth were successfully completed. The others failed to meet physical construction targets, were substantially de- layed, and operations were hampered by staff shortages. 56. In general, effectiveness of Bank lending in institution building has been well below expectations, except in utilities where there was al- ready a fairly good base with which to work. Technical assistance provided through project loans has met with Government reluctance to use loan funds for this purpose, given abundant technical assistance grants from other sources. Technical assistance operations have underprovided for and inade- quately identified and planned for training, leadi.g to frequent failure of this component. 57. While the Bank may not have been effective in institution building it did influence the transformation of some institutions and the starting of others. In the early seventies the Bank was quite influential in and supportive of Tanzania's efforts to transform cooperatives and other pro- ducer organizations into marketing boards and parastatals in the expecta- tion that they would become more efficient in serving producers. Some crop-specific lending operations by the Bank involved the establishment of new parastatals, e.g. cashewnut and tobacci. In retrospect Bank efforts lacked depth and follow-up, with the result that some of the new institu- tions should not have been created and others did not have the impact de- sired. Toward the end of the seventies Bank misgivings regarding parasta- tal performance, mirroring those of the Government, centered around their failure to capture an investible surplus. By the early eighties, the Bank, recognizing that parastatals in addition to being a burden on the public finances and being very inefficient were a source of distortions in pricing and of other disincentives to production, shifted its position to that of support for the re-establishment of cooperatives, the reform of parastatals and their privatization or abolition where feasible. 58. Project completion reports and audit reports suggest that the proximate causes for poor project results were the following: (i) bad project design, selection, and preparation; (ii) lack of skills and deficient staffing; (iii) inappropriate sector policies; (iv) infrastructure constraints; (v) inadequate support by the Government; (vi) undue haste to do follow-on projects; (vii) insufficient supervision; (viii) weak overall economic situation. The likely underlying causes can sometimes be inferred from the frequency with which certain proximate ones are cited in reviews. For instance, the frequency with which infrastructure is cited as a reason for: project fail- ure raises questions regarding the balance between infrastructure and other sectors in the country's investment program and in the Bank's lending pro- gram. The repeated reference to design, selection and preparation as causes of project failure, and the occurrence of serial failures in follow- on projects suggest that the Bank failed to identify and to heed lessons from its lending experience. Inadequate support by Government and manpower bottlenecks indicate difficulties with Tanzania's absorptive capacity; and raise questions about the overall size of the lending program. All these underlying causes point to deficiencies in the Bank's system for planning its lending operations. Some causes, e.g. sector policies and the overall economic situation mainly raise concerns about the role of the Government, but they also reflect on the linkage (or lack of it) between macro-policy dialogue and project lending operations. 59. In most sectors the highest failure rate for projects was in the mid-seventies, and coincided with the rapid build-up in lending. Many follow-on projects did not do well. These suggest that the high rate of Bank lending, coinciding with expansion in other donor project support, imposed severe strains on absorptive capacity, and was a factor in poor project implementation. The poor implementation of the lending program continued in spite of the setting up of a Project Monitoring Unit and the holding of monthly project implementation reviews. This suggests that better information on bottlenecks and problems, while useful, provided no overall solution for real constraints. Bank projects could have performed better only if Tanzania had been able and willing to shift absorptive ca- pacity from other donors' projects, or if Bank projects were so flexibly designed as to permit significant changes to get around implementation obstacles. Other donors tried to provide for this flexibility, apparently with some success, by putting a larger staff in the field on a permanent basis to monitor, learn and adjust their projects and programs during im- plementation. In contrast, the Bank with its very small Resident Mission was practically an absent parent for projects it had designed, mostly with- out adequate participation from Tanzanian officials who, lacking a sense of parenthood, failed to be sufficiently innovative and energetic in making arrangements to facilitate prompt implementation. 60. Poor project preparation and implementation were not the only defects flowing from the pressure to lend. Some projects were too large (e.g., leather industry, paper/pulp, Fourth Highway) and too complicated (Integrated Rural Development Projects, Education IV), reflecting both pressure to lend ard a facile optimism about Tanzania's ability to compete in international export markets for manufactures and to manage and coordi- nate multi-component projects; clearly a case of too superficial an appre- ciation of African realities. The Bank sometimes lent for the wrong proj- ects. The apparent rush to lend to large scale industry was wrong; and should have been seen as not in keeping with the priorities that should have flowed from a strategy emphasizing rural development and a direct assault on the problem of poverty. This too may have been due to the need to meet Bank lending targets. In retrospect, Tanzania could have been better off with less Bank lending. Many Tanzanians point to the obvious mistakes--the white elephants, which provide no benefits sufficient to offset the burden of servicing the debt that has been created. These they regard as Bank not Tanzanian mistakes;--a judgement which one may question, since after all, such projects were not imposed. Non-project lending 61. The program loan of 1974 and the program credit of 1977 fulfilled the basic objective of making foreign exchange available for essential inputs. However, the program loan of 1974 was based on policy measures Tanzania had taken and on those required under an IMF standby agreement. The program credit of 1977 was approved in the absence of an IMF agreement regarding Tanzaria's access to additional resources, but on condition that Tanzania liberalize imports to stimulate production and investment. This condition posed significant risk to the reserves in the absence of suitable fiscal, monetary and exchange rate measures, such as could have resulted from closer collaboration with the Fund. This policy-based operation was flawed by the lack of fiscal and monetary restraints to compensate for the absence of an IMF Standby Agreement. It marked the start of what turned out to be an extended foreign exchange crisis; and caused considerable erosion of Tanzanian confidence in Bank advice. I I 62. The next policy-based operation--the Export Rehabilitation Credit (1981)--was approached with greater caution on both sides, and was approved only after an agreement between Tanzania and the Fund. It did not achieve the objective of reversing the decline in traditional agricultural exports and accelerating the grow-ch of non-traditional exports. The failure was partly due to inadequate dialogue between the Bank and Tanzania over condi- tionality that was tacked at the very last stage of negotiations, and to the considerable delays and resistance in implementing those of the thirty measures which remained to be taken after the date of credit effectiveness. a The lack of monitorable indicators and data was another important flaw which contributed to the failure of this operation. The fourth policy-based operation--the Multi-Sector Rehabilitation Credit 1986) benefitted from the experieuce with the earlier operations. Most of the important measures were taken and an agreement with the Fund was in place before approval of the credit by the Bank. It attracted considerable international support. While it is too early to claim complete success, preliminary data suggest that economic recovery has begun. Sectoral Relations 63. A thematic review of sectoral relations reveals that Bank work differed among sectors in terms of approach, the role of ESW, the policy dialogue, and lending. The preceding review of project lending suggests that there were significant differences among sectors in terms of project performance. The juxtaposing of these impressions leads the reviewer to question whether and to what extent differences in sectoral work are re- lated to and can account for the differences in program performance. 64. The Bank's approach to various sectors varied between two ex- tremes. At one extreme the Bank supported a strategy that was ideological- ly determined, and that it either did not understand or did not believe to be the most appropriate. This was the case of the productive sectors- -agriculture/rural and industry; the Bank not understanding the impl!cations of villagization and decentralization for the former, and not really believing that the basic industry strategy was the most viable for the latter. At the other extreme the Bank supported sectoral strategies that were not much determined on ideological bases, and that were well understood and accepted as viable by the Bank. This was the case with telecommunications, and power and energy; in which a time-slice of a well- planned investment program, prepared and implemented by a strong institution was supported. Between these two extremes, the Bank supported strategies that reflected some political/ideological influence and that it understood. Infrastructure, education and water/sanitation fall into this category; Bank support reflecting declining degrees of definition of policies for intervention in each sector. 65. The role of ESW in guiding Bank involvement also varied between sectors. In the productive sectors- -agriculture/rural and industry ESW pointing out shortcomings of Tanzania's strategy was unheeded within the Bank during much of the seventies. This has changed in the eighties; al- though the 1983 Agriculture Sector Report recommendation that agriculture be regarded as -he leading sector has yet to be reflected in the relative allocation of l%nding or i the timing of sector adjustment operations. ESW in Education, undertaken mainly by other agencies for the Bank, and naively based on manpower planning in Tanzania, played a significant role in project identification. However the Bank was also much influenced by Tanzania's policy of diversification of the curriculum, community educa- tion, and the emphasis on primary education. The result was a hodge-podge of multi-component Bank operations with slight iocus on secondary educa- tion. Bank involvement in Infrastructure sectors was mainly guided by the ESW. This was especially true of infrastructure that was perceived as a network serving the East African Community as a whole- -railways, telecom- munications and ports. In the case of highways and road trAnsport, where Tanzanian political influence was more significant, there were sometimes sharp differences within the Bank over transport sector issues and policy. This introduced an element of confusion and blurred the link between ESW anO. op,rations. 66. The dialogue at sectoral level reflected the degree to which the Bank felt itself informed enough to adopt a critical attitude to Tanzania's sector strategies. In the agriculture/rural sector the attitude of the Bank was influenced by uncertainty concerning the experimental approach of Tanzania, by weakness of the information on production, and by disagree- ments within the Bank. The result was that until the early 1980s the Bank failed to communicate its concerns over policies affecting the sector, focussing instead on the problems in lending and implementation, and talk- ing only to civil servants rather than to the political directorate. Sim- ilarly, in industry the Bank made no effort to dissuade the Tanzanians from embarking on an overly ambitious industrialization program; and did not seriously challenge the strategy nor present more viable alternatives. Concerns expressed in the ESW were usually not followed up, or were commun- icated to Tanzania without eliciting any commitment to action. It was not until the mid 1980s that incisive sector work within the Bank provided the basis for a dialogue on changes in industrial policy. By contrast to the productive sectors, the dialogue on infrastructure, especially transport, from the early 1970s reflected the clash between the Bank's free market and Tanzania's socialist approach. During 1972-77 there were disagreements within the Bank resulting in mixed signals and greater accommodetion of Tanzania's view, but the 1977 Transport Sector Memo provided the basis for firmer views regarding the genesis and solutions of sector problems. Dis- cussions focussing on the weakness of the Ministry of Works became so in- tense as to be interpreted as personal criticism of Tanzanian managers and led to the breakdown of communications in 1979. Subsequent discussions shifted to the rehabilitation needed in response to the deterioration of physical infrastructure due to the economic crisis of the 1980s. The assessment is that the twenty-five years of dialogue in this sector has borne fruit, e.g. in the pricing and licensing in road transport; and there are few investments of doubtful economic worth. The Education Sector is unique in that there was a near absence of policy dialogue. This was prob- ably due to the highly ideological approach Tanzania took toward education, but the subcontracting out of ESW by the Bank and the absence of educators on supervision missions may have also contributed. 67. Lending also differed among sectors; with the distribution of lending over time apparently varying inversely with the level of Bank dis- affection with Tanzanian sector policies. Thus in the agriculture/rural sector nearly two-thirds of total lending to the sector was undertaken during 1973-78, and would have been even larger if lending plans had been achieved. Over three-quarters of total lending to industry occurred during 1975-79. In infrastructure there was far less concentration of lending during the mid seventies, with only one-quarter of total lending occurring during 1973-79. Education was between the extremes above, with about one- half of total lending having been approved during 1973-79. The major share of total Bank lending to Tanzania went to infrastructure sectors, which received about the same as agriculture/rural and industry combined. Lend- ing to the social sectors was a relatively small share of the total. 68. The productive sectors- -agriculture/rural and industry exhibited the most disappointing peiformance. They are also those in which the Bank supported a highly ideological Tanzanian strategy with a concentration of lending during the mid-seventies, even while ESW was pointing to the sig- nificant sacrifice in GDP growth compared w,th alternative approaches which would give higher priori;y to investment for growth over investment for technological and political transformation. Critical ESW failed to influ- ence the official posture of the Bank, and an effective policy dialogue was late in starting. In the infrastructure sectors the performance of Bank lending varied from marginally to substantially better than that in the productive sectors. These are sectors for which the Tanzanian approach was not heavily ideological, but was subjected to technical scrutiny in the Bank and was the subject of a qu!ite critical dialogue early in the post- Arusha period. Although there was a brief period when the Bank's forth- rightness was compromised by internal debate, there was renewed contention over policy issues right after the 1977 Transport Sector memo. Signifi- cantly, lending to infrastructure was less concentrated during the mid- seventies and absorptive capacity limitations were less of a factor in performance. The mixed performance of lending to education reflects on the positive side the absence of extreme concentration during the mid-seven- ties, and on the negative side the lack of focus deriving from the attempt to support without regard to Bank comparative advantage too many components of the Tanzanian diversification/vocational strategy and the uncritical acceptance of sector analyses done by other organizations as the basis for design of some lending operations, (e.g. Bank curtailed support to secon- dary education on the basis of locally done manpower analysis unsuited to a situation of rapidly changing skill needs). Thus the performance of Bank lending in various sectors seems to have been related to the attitude of the Bank to the strategy employed by Tanzania, to the extent to which inci- sive ESW was done and was heeded by Bank management and influenced lending, and to the policy dialogue. 69. This conclusion based on intersectoral comparisons does not con- stitute the total explanation of the performance of Bank lending. A more detailed analysis including that of the inter-subsectoral and within-sub- sector experience suggests other factors of importance. For instance, within the infrastructure area better performance was associated with the quality and stability of institutions and the freedom from political inter- ference. Thus in telecommunicaticons, ports and harbors, which for long came under control of EAC, strong institutions persisted until the general economic crisis of the early eighties. Power projects benefitted from the institutional integrity of TANESCO. On the other hand in the transport sector, frequent changes in institutional framework and greater political interference adversely affected sector performance and the effectiveness of Bank projects. Other factors suggested by detailed sector analysis include the transferability of technology and the appropri,teness of project design assumptions. For instance lending to agriculture suffered from the problem of unavailability of ready-made technological packages suitable for Tanza- nian soil, climate, and cultural conditions. Infrastructure by its nature admitted of greater transferability of the essentially engineering technol- ogy and hence the greater relevance of Bank experience. Yet another exam- ple is the greater sensitivity to assumptions regarding market demand for output and regarding the supply of recurrent inputs in the case of the productive sectors relative to the infrastructure and social sectors. 70. The conclusions which may be drawn from the analysis of sectoral relations relite not only to the possible reasons for the performance of the Bank in lending and advice in each sector, but also relate to how the overall performance wa§ affected by the di,;tribution of Bank involvement among sectors. Clearly, overall performance might have been worse had the Bank shifted lending more decisively to the productive sectors during the seventiez, especially given the unheeded warnings of technical staff and of the ESM and the failure to influence the policy environment through criti- cal dia*lge.a. The relatively large size of the program to infrastructure and the greater degree of knowledge, confidence and direction which the Bank brought to bear in this sector, producing as it did better perfor- mance, mitigated somewhat the overall disaster. 71. The overall experience underscores the need for the Bank to up- grade its ability to do the multi-dimensional analysis indispensable in designing and supervising operations in sectors where political, social and cultural factors are important determinants of project outcome. The fail- ures in the productive sectors also point to the need for economic analysis to be more realistic regarding the possibility that determining factors may turn out far from ideally, either individually and as a group. The failure of complex, multi-component projects in agriculture/rural and in education as against the success of simple support of time-slice capital investment programs involving the procurement and installation of machinery, speaks loudly regarding the relative strength of the Bank and also of the impor- tance of tailoring project design to the supply and capability of indige- nous planners and managers. 72. The review of sectoral relations also permits an appreciation for the successes/benefits of the Bank's program. In telecommunications Bank technical advice helped improve technology, standards and procurement pro- cedures, while Bank involvement facilitated the mobilization of significant cofinancing. Bank operations in urban development, though few, benefitted planning and implementation capability through manpower development. With I virtually all bilateral assistance directed to rural development, the Bank has been the only source of technical assistance to urban development. Further assistance would be justified by an under- recognized, looming urban crisis in Tanzania. Bank efforts in water and sanitation can be credited with the setting up of a National Urban Water Authority, although this institution still suffers from inadequacy of trained staff. While clarification of Bank policy in this sector should be a precondition for future involvement, the time may be ripe for a rethinking of the role of urban water supply and sanitation in national development, given the in- creasing urbanization of the population and the potential health risks inherent in the absence of minimum services in areas of rapidly increasing density. In the energy and power sector the Bank improved planning, pro- curement and skills; and prepared a comprehensive assessment of the energy situation. Recent support of power sector rehabilitation is meeting an essential requirement for rzsumed gro th in many sectors. In the transport sector the Bank has been influential in the liberalization of the trucking industry, and in procuring a higher priority for road maintenance. Final- ly, Bank technical work has led to a rethinking of the manpower approach to education planning, and probably as a result the Government has become more responsive to demand and has reconsidered its policy of severely restrict- ing secondary school places. Lessons and Recommendations 73. Some readers may find the issues and recommendations that follow to be overly general. Indeed, even highly operational recommendation ., when presented in a condensed form, can easily appear trite. More specif- ic, directly applicable lessons of experience are outlined in the detailed analysis in the main body of the report. Even the general recommendations offered, however, have not been consistently followed during the Bank's decades of involvement with the development process in Tanzania. The auth- ors of this report consider these recommendations essential building blocks in the Bank's relations with borrower countries. The main lessons from this review relate to Bank strategy, the economic and sector work, the policy dialogue and the lending program, and although derived in the con- text of Bank/Tanzania relations may be of more general applicability. Regarding Bank Strategy: (i) As a basis for its own approach, it is necessary that the Bank understand fully the client's development strategy (and its opera- tional implications for policies, institutions, and investments) before committing itself to support it. This was a major failing in Bank/Tanzania relations, when it appears that the Bank, satis- fied that the rhetoric of the Tanzanian leadership appeared to be in concert at least in spirit with Bank views regarding develop- ment goals and priorities at the time, never seemed willing to risk disfavor by calling for clarifications or investigating deep- ly the practical applications of the unique Tanzanian approach or to update its understanding from time to time when there were indications of a shift in policies. (ii) Paying close attention to the historical, cultural and political context, and looking ahead to see where important trends may be leading, the Bank must identify what role it should play in assisting the country in implementing its development strategy and/or in getting the country to modify its approach. This role, articulated in a coherent statement of Bank strategy, based on high quality ESW, must be realistic in terms of what the country and the Bank can achieve during a specified time frame given existing conditions and relevant constraints. Bank over-optimism regarding Tanzania's absorptive capacity and its willingness and ability to undertake policy reform has been a constant in Bank/ Tanzania relations. (iii) It seems desirable that as far as possible the role of the Bank should be agreed with the client, so that the client would know exactly what to expect of the Bank, and under what conditions. Much of the confusion in Bank/Tanzania relations in the late sev- enties and early eighties was due to the expectation that the Bank would be a source of short-term balance of payment support. (iv) Regular review of Bank strategy, based on evaluation of lending and dialogue and taking into account information and analysis of recent ESW, is needed to keep Bank assistance relevant and effec- tive. This would serve to avoid continuance of support of a de- velopment strategy that is or has become defective, and to permit adjustments in light of new information and insights especially regarding policy recommendations the Bank has given. The CPP approach did not involve a sufficiently honest and soul-searching review of the Bank's program in Tanzania. Partly this was due to the downplaying of critical ESW, and a reluctance to allow the conventional wisdom of the day to be challenged in debate. For the near future the Bank should especially monitor the impact of its advice based on currently popular views, e.g. on liberaliza- tion and privatization, to make sure that the requisites for suc- cess of these policies are indeed fulfilled in Tanzanian circum- stances. An important lesson from the Tanzanian experience is that limitation in public sector capability in the planning and implementation of policy reform, in economic management, and in many levels of administration has been a key issue in development. Early attention to this must be top priority if Bank assistance, which must operate through the public sector, is to be effective. Regarding Economic and Sector Work: (i) The principal aim of ESW is to provide an adequate information base for analysis and decisions both by the Bank and by the cli- ent. Given that ESW is the indispensable basis for an effective policy dialogue and an appropriate lending program, it should be assigned higher priority within the Bank than in the past. Addi- tional resources are needed to support more study and monitoring of political, cultural, social and ecological aspects of develop- ment, especially in view of the Bank's envisaged expanded role in policy advice and institutional development and in view of its still limited understanding of the African ethos. Special impor- tance should be given to the design of several policy options (scenarios) as well as to the impact analysis, which would show the expected results of each package. (ii) In countries like Tanzania, the Bank could do more to assist in developing an adequate data base. Information and analysis done within the Bank could be shared with officials and the intellec- tual community more fully and regularly than in the past. (iii) There has been an underused opportunity to help Tanzania in public sector investment programming. There is a need for periodic pub- lic investment reviews, which if done jointly with the country's officials could be an important learning opportunity for both sides. Greater Bank involvement could give the Bank some of the inputs necessary for a continuing assessment of the overall demands on absorptive capacity, for monitoring the recurrent cost implications of the program--an important factor in sustainability of Bank projects; and for supporting the dialogue on the public finance aspects of structural adjustment. (iv) As long as the Bank's main business is lending for projects, ef- fectiveness requires, inter alia, keen attention to absorptive capacity, i.e. the capacity to install, use and manage investment projects, and to the competing requirements of projects financed by other lenders and by the client itself. Bank ESW should devel- op suitable indicators of absorptive capacity against which to monitor the country's investment program. (v) The review of Tanzania's development and the experience of the Bank in supporting te process clearly underlined the importance of an appropriate policy framework at the macro and sectoral levels. ESW must pay special attention to policies not only in the context of general economic reviews but in the design of spe- cific lending operations. Care must be taken not to copy policy prescriptions without regard to the need to adapt them to the peculiar conditions of each country. In the Tanzanian case, lit- tle attention was paid to the limited capacity to undertake policy reform at the outset of structural adjustment discussions. Also the peculiar political context and the unique attention to social goals seems not to have been given much weight in defining Bank positions on the adjustment process. It was left of other intitu- tions to point out that the process espoused by the Bretton Woods institutions put basic needs in danger. Regarding the Policy Dialogue: (1) Over time the Bank has become more assertive in its effort to influence the policy environment in Tanzania, moving from a posi- tion of reluctance to initiate discussion of the country's strat- egy to one where policy conditionality attached to lending opera- tions is the norm. The rush in the eighties to create a policy environment that the Bank believes will foster development is an uncomfortable parallel of the rush to lend for projects in the seventies. One lesson to be drawn from the lending experience for the policy area is the need to move cautiously and carefully, and at a realistic pace. The aim must be to ensure that policy pre- scriptions are adapted to local conditions and that the mixture of the old and the new does not lead to perverse effects. To achieve this the Bank's role in the policy area should be advisory rather than mandatory, and the country's leadership should be allowed time to understand, modify, and accommodate new proposals to the unique conditions of their society and to the broader goals of national development. (ii) There may be occasions when the Bank may decide that in the ab- sence of certain policy adjustments lending for specified purposes would be inadvisable. In such circumstances the Bank should make this clear in the policy dialogue, presenting its assumptions and analysis justifying its position. To a large degree this decision may have to be based on judgement rather than hard analysis, but the Bank should be careful to avoid using the threat of holding the lending program (wholly or in part) hostage as a substitute for cogent arguments in its policy dialogue. To do so will result in mistrust of Bank judgement, and will be counterproductive. (iii) The Bank should seek to maintain e broad, continuous, non-confron- tational interchange regarding the country's development strategy and the economic outlook given the state of and trends (including those on commodity prices and trade) in the world economy. As much as possible these discussions should involve the intellectual community in the country, the political directorate, government officials and the private sector. Donor representatives should be invited to participate. The Resident Mission would play the major role in organizing and keeping this dialogue going. This type of dialogue is necessary to complement the more issues-oriented in- terchanges usually triggered by crises. (iv) In the more restricted discussions with the government the Bank should take the initiative in raising issues of importance to the country's development, without regard to whether or not a lending operation is likely to result. The corollary to this is that the Bank must be willing to listen to the country on matters which may not be high on the Bank's agenda. (v) The approach to the policy dialogue could benef it from more con- scious strategic planning than seems to have been done in the past. Objectives should be predetermined for each phase. Espe - cially but not exclusively where it is decided that the objective is to negotiate, it may be useful to establish a more formal pro- cedure for clearing and agreeing Bank position on crucial issues and communicating these to staff involved in the negotiations. This position should be the outcome of open and frank analysis and discussion within the Bank. Procedures of this sort would serve to reduce the incidence of conflicting advice from the Bank ex- perts, minimize the use of "authority" in determining technical issues, and would be designed to promote a more collegial Bank culture. (vi) With many staff of varying professional backgrounds giving advice and engaging in policy discussions it is absolutely essential to have in place procedures for coordinating this advice, and for factlitating the informal consultations that should take place between staff. It is recommended that staff be required to pro- vide to a central location a written summary (typically a back-to- office report) of any discussions with the client. This location should be a designated officer of the Country Operations Division, who would have the responsibility for monitoring, collating, sum- marizing and dio~seminating this information to relevant staff at regular intervals. (vii) Other institutions and donors are also giving policy advice. The Bank needs to ensure that as far as possible other donors are not contradicting Bank advice. The Bank should use its lead role in Consultative Groups as an opportunity for developing among major donors a consensus on specific policy issues. This would comple- ment the broader dialogue on development in which donor represen- tatives in the client country would participate. (viii) In planning the policy dialogue the Bank should approximate equivalence of rank with country representatives in deciding the make-up of its delegations. This could reduce the disadvantage inherent in the use of junior Bank staff tc, negotiate with Ministers and top officials, and probably reduce the need to re- sort to leverage. It would mean more involvement in discussions and more frequent visits to member countries by Regional Vice Presidents and Country Directors. (ix) Finally, the most effective approach to the policy dialogue is likely to be one which starts with high quality technical prepara- tion by Bank staff; followed by joint exploration of the options with the client's technical staff; then by advice or recommenda- tion; and, only after these, by negotiation. The experience in Tanzania has shown that the Bank must either lead the way in sug- gesting technical solutions or have third-party technical experts suggest them. It is important to bear in mind the limitations on a country's capacity to design and implement comprehensive policy reforms. Greater attention must be given to the improvement of this capacity through training and technical assistance, both free-standing and as an integral part of project development and implementation. Regarding the Lending Program: (i) The size of the lending program needs to be more closely re- stricted by the country's absorptive capacity. The decision pro- cess for setting lending levels starts with a normative level for the region set without reference to absorptive capacity of the region. While absorptive capacity considerations influence where the country is placed above or below the norm for the region, the lending target for the country can still be excessive. This is especially likely if for some reason lending to other members of the region has to be curtailed, since lending for the region is not necessarily adjusted accordingly. (ii) There needs to be closer linkage between ESW and the client's investment program on the one hand and the Bank's lending program on the other. The link with ESW is to ensure that lending is in support of an appropriate strategy and pays attention to the eco- nomic constraints and opportunities. The latter is to ensure appropriate balance (e.g. between SAL and infrastructure), proper sequencing of operations, and consistency with the programs of other donors. (The balance between rural and urban development is a subject that should be reconsidered in many developing countries where, as is the case with Tanzania, the trend is distinctly toward greater urbanization of the unemployed.) (iii) The -xperience in projects suggests that, to be successful, design should be simple and with few components, and should be the result of a process allowing participation and a sense of parenthood by client officials. Training and technical assistance components need to be well identified and implementation initiated early in the project cycle. Under-identified components invariably fail and should be excluded from the project or the project delayed until they are adequately identified and designed. (iv) As a general rule the Bank should avoid suggesting the setting up of new institutions if existing ones suitably strengthened can do the job. At the same time the Bank should thoroughly analyze the structure, functions, staffing and finances before assuming that existing institutions can accept additional workload. (v) The setting up of enclave units to implement specific Bank proj- ects should be avoided. Instead. the Bank should explore the strengthening of the institutions regularly responsible for such projects. Enclave units tend not to survive the project long enough to be able to ensure its sustainability. Similarly, with an eye to the longer term, the Bank should not espouse the use of technical assistance at the expense of learning by doing on the part of the country's people. Where technical assistance has to be used the necessary managerial framework must be built around indigenous managers and administrators, which in turn means train- ing ahead of regular implementation. (vi) The Tanzanian experience suggests that supervision should place considerably more emphasis on developing the information base for making adjustments in all components of the project and on getting it to the operational stage, and correspondingly less on the iden- tification of follow-on projects. Covenants should be enforced. It is assumed that they would be specific, monitorable, and only included when undoubtedly necessary, likely to be useful, and where the Bank intends to enforce them. (vii) finally, out of consideration for the burden of debt imposed on clients by failed operations, and in the interest of better rela- tions, the Bank should consider allocating resources for investi- gating the possibility of salvaging some projects and for remedial lending in promising cases. Regarding Aid Coordination: (i) In Tanzania the Bank has been playing an increasingly important role in aid coordination, the aim of which is to help the country mobilize an adequate amount, of appropriate composition, and maxi- mize the effectiveness of external assistance. This carries with it the responsibility to ensure that the total of amsistance the Bank seeks to raise at varying times and its composition are con- sistent with the country's capacity to absorb external resources. The Bank can only discharge this responsibility if it is closely involved in investment programming and in the assessment of mana- gerial/skill/manpower as well as the recurrent expenditure and local financing requirements of the program. This means that the Bank needs to commit more resources for ESW in support of its pivotal role in the consultative group. (ii) Aid coordination within Tanzania to ensure efficient utilization does not logically fall to the Bank; the Bank has been participat- ing in an informal process of information interchange with donors' representatives in the country. However, the effectiveness of Bank participation has been compromised by the small size of the Resident Mission. Given the large number of donors and projects, and the relatively small size of the Mission when compared with the numbers of field representatives of other donors the Bank Mission cannot participate in all the important coordination meet- ings that take place. Participation is essential even for the mora limited objective of smooching the way for implementation of the Bank's own operations. (iii) In 1987 the Government of Tanzania met with donors to try to set up a formal aid coordination structure after years of resisting the idea for fear of donors "ganging up" against it. The UNDP had been asked to serve as the secretariat for the time being. The Bank should consider taking on this function or supporting through technical assistance its development within the Planning Office if the UNDP does not wish to continue it on a permanent basis. 74. While Bank/Tanzania relations were special due to the uniqueness of the Tanzanian approach to development, there is much that is common with the Bank's experience in other African countries. Many of the problems were derived from more general causes and the lessons and recommendations are of wider relevance than a single country study may suggest. A compara- tive analysis of the several individual country studies in this series will help to further identify and cristallize these lessons of wider import to the institution. TANZANIA WORLD BANK/TANZANIA RELATIONS, iAl-1987 I. INTRODUCTION Purpose of Review 1.01 The general purpose of reviews of the Bank's activities is to identify the lessons from past experience which may provide guidance in designing future Bank work to enhance its effectiveness in assisting cli- ents toward their development objectives. Most of the Bank's retrospective evaluation work has tended to focus on projects, but this provides only a partial view of the institution's effectiveness. The impact of the Bank on a client's development depends on the totality of a relationship reflected in project-based and policy-based lending, the dialogue on policy matters and the supporting economic and sector work, as well as the part it plays in coordinating assistance by other donors. A more comprehensive evalua- tion of effectiveness, therefore, requires a review of this totality to determine whether these components together comprised appropriate interven- tions in the client's development effort, based on their combined impact on overall economic performance, on the distribution of benefits, and, more generally, on living standards of the population. 1.02 What makes the review of Bank/Tanzania relations of particular interest is that the country's economy stagnated despite the government's strong commitment to development and despite the large amounts of external assistance received by Tanzania from the Bank and from other donors. Over the 1965-1986 period as a whole Tanzania's GNP per capita declined by 0.3% per year on the average,1 and there was failure to sustain the substantial improvements in infrastucture and in social services that were made in the early years. 1.03 Tanzania has enjoyed a high degree of political stability, with no militar.y coups or other forcible change of government such as has been the experience of many, if not most, newly independent African states. The government has pursued a steady course aiming at growth with equity and at self-reliance. In the 1960s the economy grew at a satisfactory pace, but in the 1970s growth was stemmed by the dissolution of the East African Federation, by the two oil crises, and by the Uganda war. It is clear, however, that policy has also been at fault. Since the beginning of the eighties the Government and donors have been seeking ways to make more effective their efforts in support of Tanzania's development; and Tanzania has embarked on a program of structural adjustment. More recently, there has been an emerging consensus, especially among major donors, that a com- prehensive review on the part of all participants is needed to design a new strategy to secure the country's future progress. 1/ IBRD: World Development Report 1988; Table 1. 2 1.04 Since 1962, when it joined the Bank, Tanzania has made ample use of the Group's credit facilities. The Bank Group is Tanzania's most impor- tant creditor; and as of the end of March 1988 total Bank loans and IDA credits granted to Tanzania stood at US$1,499 million, of which US$833 million had been disbursed, and IFC has invested US$8 million in three industrial enterprises. In addition, Tanzania's share of the loans to the East African Community amounted to some US$37 million. On a per capita basis, Tanzania's outstanding debt to the Bank Group at the end of 1986 was US$39 compared with GNP of US$240. 1.05 Over the twenty-five year period, the relations between the Gov- ernment of Tanzania and the Bank usually have been marked by close coop- eration, though occasionally, there have been difficult periods. Despite the fact that the same Party has been in power throughout the period, and its philosophy of development has essentially remained unchanged, its poli- cies have ranged from highly pragmatic to dogmatically socialist. There were changes, too, in the Bank's attitudes. Strict application of effi- ciency criteria gave way, in the 1970s to an emphasis on equity, while the 1980s were marked by a return to resource allocation and mobilization con- cerns. 1.06 The closest cooperation was achieved in the early 1970s when Bank President McNamara's goal of growth with equity was perceived as being in harmony with President Nyerere's basic needs approach to the &lleviation of poverty. Shortly, Tanzania's development strategy shifted in emphasis toward public sector operation of basic industry, the creation of an agrarian cooperative economy through compulsory resettlement of the rural population into planned villages, and toward the decentralization of public administration, and the guidance of the economy through direct controls and administered prices. Continuing and increasing Bank lending was not fruit- ful in economic results in the presence of an approach which helped to bring the economy to the brink of collapse. 1.07 At the close of the 1970s, disagreements over the primary reasons for poor economic performance and over the need for fundamental policy changes led, at first, to almost total estrangement. But the deepening economic crisis strengthened the position of pragmatists within the Tanza- nian Government; and the Government, without necessarily compromising its socio-political goals, became willing to reconsider its strategy along lines suggested by the Bank. The Bank, on its part, rev%.;rted to the prac- tice of basing its advice on technical considerations, and redoubled its efforts to mobilize bilateral and multilateral support for Tanzania's attempt at structural adjustment of its economy. 1.08 This review covers the period between Independence in 1961 and the end of 1986. The 1986 cut-off date has been mandated mainly by the una- vailability of reliable data beyond that date, but is not strictly adhered to where there is additional information of relevance to the particular matter under discussion. The cut-off date comes just after the signing of the Multi-Sector Rehabilitation Credit in November 1986 which marked the resumption of large-scale Bank support of Tanzanian development, since the hiatus in lending earlier in the decade, and the beginning of a new era in | Bank/Tanzania relations. Subsequent tranches of the Multi-sector Rehabili- tation Credit were approved in 1988 and an Agriculture Export Rehabilita- tion Credit was also agreed. Clearly, it would be premature to attempt to assess the impact of these recent initiatives at this time. 1.09 The review focuses on three broad issues, namely : (a) Hiw did Bank/Tanzania relations develop over time? (b) Why did relations evolve in the manner observed? (c) How effective has been the Bank in its efforts to assist Tanzania's development? 1.10 In conclusion an attempt is made to 6raw some lessons applicable to future Bank work in Tanzania and elsewhere. The first one concerns the planning of a Bank strategy in situations where the Bank and the government differ on the basic approach to economic or to social issues. Second, are the lessons concerning policy dialogue, and finally those relating to the lending policy. II. TANZANIA'S DEVELOPMENT STRATEGY AND ECONOMIC PERFORMANCE From the Achievement of Independence (1961) to the Arusha Declaration (1967) 2.01 At Independence Tanzania was mainly an agricultural country, pro- ducing food for domestic use, and sisal, coffee and cotton for export.2 Certain sectors, e.g. sisal production, were in the hands of European plan- tations, but African farms played the major economic role. Depending on the natural conditions of the area and on the crop that was grown native farming displayed a vast variety of patterns, ranging from dispersed farm- steads to organized villages, and from subsistence to Ocapitalist type, farming. Among some farmers, notably those growing coffee, cotton and flue-cured tobacco, there was a strong cooperative movement. 2.02 Industry was at a rudimentary stage, with cotton ginning the only important activity. At Independence total industrial employment was 20,0003 2/ In 1958 agriculture and animal husbandry generated an estimated 67Z of the GNP. In 1957-58 sisal was the major export crop (24.4Z of total value of all exports) followed by coffee (18.1Z) and cotton (17.OZ). Diamonds (9.4Z) and gold (2%) were the only important non-agricultural exports. See Report of a mission organized by the IBRD, The Economic Development of Tanganyika, Baltimore: The Johns Hopkins Press for the IBRD, 1961, pp. 12 and 15. 3l 1971 Economic Memorandum on Tanzania, p. 16. Tanzania: Agenda for Industrial Recovery (1987) gives the number at "about 25,0000 (p. i). out of an economically active population of 5 million. To foster industri- al development the Government, acting under the Industrial Licensing Ordi- nance of 1952, gave selected firms local monopoly power and protection from foreign competition, but otherwise tariffs served only revenue purposes. 2.03 Tanzania inherited from the pre-Independence period a system based on government-regulated private enterprise. The Government guaranteed minimum prices on major marketable crops, and imposed rules relating to production. Various crops were exported through parastatals, and a para- statal, the Tanganyika Agricultural Corporation engaged in land development and in production. No significant changes wece made in the system during the 1961-64 period, when policy was guided by a Three Year Plaa largely prepared before Independence.4 2.04 Though the independent country's ruling party, the Tanganyika African National Union (TANU) was socialist in ideology, the First Five Year Plan, adopted in 1964, retained the free enterprise economy. The State was given, however, a more active role in promoting development. Agriculture was to continue as the leading sector, and its growth to be promoted, in accordance with 1961 World Bank recommendations, by measures involving both "improvement" and "transformation".5 The "improvement" ap- proach called for government sponsored extension, marketing, and credit services, while "transformation" was to involve the organization of pilot village settlement schemes to foster modern cultivation methods. Income generated by agriculture would expand the domestic market for manufactures thereby facilitating import substitution. The 1964-69 Plan broadened the scope for import substitution by introducing restrictions on certain in- ports including some from partner states in the East African Common Market. 2.05 The First Plan also marked the beginning of Africanization. In order to provide the necessary skills for local civil servants who were to replace the expatriates the Plan called for investment in education, ini- tially mainly in secondary and technical schools. Greater independence was also sought in the monetary policy area: the abolition of the Currency Board and the establishment of a Central Bank (1966) sev-red the rigid linkage of the money supply to Sterling balances. All the changes not- withstanding, the First Five Year Plan period is notable for the high de- gree of continuity with the past and the slow pace of policy evolution. Economic Performance 1961-67 2.06 Economic growth was fpvored during the first six years of indepen- dence by good weather and by the absence of major external shocks. It was also favored by policies which, while tending toward increased government control and protectionism, were characterized by moderation and by a high degree of continuity. 4/ See Andrew Coulson, Tanzania, Clarendon Press, Oxford, 1982 5/ IBRDt The Ecoaomic Development of Tanganyika, Johns Hopkins Press, 1961. 2.07 The available data indicate that between 1961 and 1967 average GDP growth surpassed 6% per year.6 The 1964-67 average real GDP growth was estimated at 6.4%. Agriculture, the mainstay of the economy, grew at 4% per year. Expansion of export crops was particularly rapid. Exports (mainly agricultural commodities) acted as an "engine of growth" and rose, in quantum terms, at 8Z per year. Manufacturing aided by a moderate rise of protective tariffs, expanded rapidly from a very small base. The 1964-67 annual rate of growth of output was estimated at 13.5%; the share of GDP represented by value added in manufacturing rose from 10.5% in 1964 to 12.3% in 1967.7 Tanzania's Development Strategy - Arusha and Its Aftermath 2.08 The Arusha Declaration in January 1967 confirmed the zommitment of the ruling party to the goals of establishing a socialist state and of self-reliance in national development. The Declaration and the &ssociated detailed pronouncements on education, rural development, public ownership, etc. have been the main guide to all subsequent government policy deci- sions. The establishment of socialism was considered essential to the achievement of economic justice and equality. State control of the prin- cipal means of production and distribution was considered necessary to the satisfaction of the basic needs of the entire population: adequate nutri- tion, housing, and clothing. State provision of the basic services of health, education, sanitation, and water was required to ensure access by all Tanzanians to at least a minimum standard of these services. Self- reliance was to be pursued in order to avoid the dangers to national sov- ereignty and to reduce dependence on foreign aid. Self-help was to be practiced at all levels, but a major emphasis was put on agricultural/rural development. Self-reliance was also interpreted to require the rapid Afri- canization of the civil service and parastatals. 2.09 The declaration was followed by the extension of government con- trol over production, marketing, distribution, and financial and other institutions. Firms occupying the commanding heights of the economy were nationalized. In rural areas, ujamaa villages that were to be the basic rural economic and social communal units were organized. In contrast to the earlier attempt at villagization, which emphasized.the use of new tech- nology and called for considerable investment, the chief purpose of the ujamaa program was to trar-',rm the isolated farmers into socially con- scious and politically active citizens, ready to engage in common en- deavors. The intention was to urge through selective incentives the volun- tary cooperation of existing villages; but progress was slow and dissatis- faction with the pace led to compulsory villagization beginning in 1973. 6/ Data for the 1961-64 period are not readily comparable with later figures, and therefore estimates of growth for 19CI-67 are subject to a wide margin of error. 7/ Tanzania Basic Economic Report, (1977), Table 2.2. - 6 - During the next three years some 13 million people or three-quarters of the population (estimates vary) were relocated under the program. 2.10 New land policies accompanied villagization. The traditional tribal authority was replaced with public ownership, restricting individual right of ownership and sale, but allowing communal land rights to continue. Later, under the Acquisition of Buildings Act (1971) the state was empow- ered to acquire any rental property over P. certain value, with compensation equal to original construction cost minus 10 percent per year for each year that the owner had owned the building. Restrictions were placed on the inter-regional movements of labor, use of hired labor on small holdings was discouraged, trade unions were encouraged in estate agriculture. and a minimum wage was actively implemented. Worker councils were announced in 1969, and worker participation in management of public enterprises ( mainly nationalized firms in manufacturing etc.) was promoted until found to be undermining discipline and abandoned in 1974. 2.11 In marketing, traditional cooperatives, which with government encouragement had grown rapidly since Independence, were given exclusive marketing rights, replacing private (mostly Asian) traders. Some marketirg boards were also set up. Gradually cooperatives were brought increasingly under state control, converted to multipurpose organizations and beginning in 1975 were replaced with parastatal institutions. Tanzania's development strategy, characterized by extensive state control of the distributive, productive, and financial sectors of the economy, involved the creation of a large number of parastatal organizations--the number increasing from 70 in 1967 to 400 in 1981. Among them, a State Trading Corporation was set up in 1967 to replace the nationalized firms in international commerce. In the mid-seventies Operation Maduka--a program to close private village shops was started. The move toward state control in distribution was ac- companied by extensive regulation of prices. Price policy aimed to mini- mize inflation and to promote equity through uniform national pricing. 2.12 In production, the major change was that industrialization was to be spearheaded by public enterprise, although private industry continued to be tolerated. Consensus regarding what constituted a socialist industrial strategy emerged slowly. Initially, Tanzanian industry, heretofore mostly confined to final-stage manufacturing, was to be diversified to include backward integration and the processing of native raw materials. Gradually there was a shift toward the view that industry should provide the basis for the structural and technological transformation toward a broad-based industrial structure, with capability ia capital goods and aiming toward industrial self-reliance in the sense of minimal reliance on world trade for manufactures. This approach was articulated more fully and formalized in the Basic Industry Strategy in the mid-1970s. Basic needs rather than consumer preferences would determine production priorities for consumer goods. In meeting these priorities, a group of basic (core) industries e.g., iron and steel, metalworking, construction materials, chemicals, would be developed to provide producer goods and inputs to the consumer goods industries.8 8/ See Chap. on "Tanzanian Industrialization Effort 1961-870 Section II. 2.13 While there was the clear desire to move the country away from its heavy dependence on agriculture, it was recognized that agricultural pro- duction had to be increased to earn foreign exchange. To this end, export crops were encouraged through credit facilities and specific projects, e.g. smallholder tea, flue-cured tobacco. Export crop diversification was also promoted to minimize risk from declining world markets. Fruit, vegetables and fish were encouraged to alleviate nutritional problems; and rice, wheat and dairy products to substitute for imports. The establishment of 29 new state-run farms was also proposed in the 1969 Five Year Plan. In the 1976 Plan the goal was to achieve self-sufficiency in food by 1981, by shifting from small to large scale farming and using irrigation.9 2.14 On the political side, the decentralization of Government and Party was an important aspect of the Arusha strategy. The objective was to give the regions greater autonomy in the administration of their develop- ment, and to foster popular participation in policy-making through village assemblies and councils. The decentralization of government administration took effect in July 1972. Responsibility for planning and administration of services devolved to the regions, with Regional Commissioners reporting directly to the Prime Minister's Office. Headquarters staff of Ministries were mostly transferred from Dar es Salaam to the regions and came under control of Regional Commissioners and not their respective Ministries. The Party was to develop a parallel regional structure, and have responsibility for mobilization and political education. 2.15 Tanzania's foreign policy was based on two principles: non-align- ment and the liberation of southern Africa.10 In foreign policy terms, self-reliance, initially meant to indicate the willingness to forego exter- nal aid, was reinterpreted to mean diversification of sources, ostensibly to avoid any compromise of independence; and was reflected in this policy of non-alignment. Economic Performance - 1967 to 1973 2.16 Economic growth slowed markedly during the initial post-Arusha declaration phase. The 1967-73 GDP growth rate reached an average of only 4.32 per annum, although by 1973 gross investment reached some 20Z of the GDP. The rate of agricultural growth (2.6% per annum) barely surpassed that of the population. That of industry, while still high, (5.2Z per year) was markedly lower than in the previous period. The fastest growth was registered by services and administration. 9/ See Chap. on "Review of Agriculture and Rural Development, 1961-86" Section II A. 10/ Coulson, Andrew: "Tanzania - A Political Economy"; Oxford University Press 1982. A Period of Increasing Structural Strains: 1973-78 2.17 The rapid introduction of numerous structural innovations imposed a heavy burden on the administration, strained human resources, and dis- rupted the economy. From 1973 to 1978 GDP growth, slowed to about 2.32 per year.11 In 1973/74 growth was adversely affected by a severe drought in, which reduced production of domestic food and export crops. Thereafter, agriculture devoted to domestic food production performed well, despite the setback caused by drought, and despite the disruptive effects of villagi- zation. Agriculture appears to have grown during this period at a faster pace than it did between 1967 and 1973. On the other hand, GDP arising in industry, rising investment notwithstanding, increased by only 1.2% per annum, as efficiency declined.12 Exports of goods and non-factor services, decreased by one-third in real terms between 1973 and 1978; reflccting the failure of export crops to recover after 1975. This occurred although the index of prices of non-fuel primary exports (1980=100), after a temporary decline in 1975, moved in favor of Tanzania (mainly under the impetus of unusually high coffee prices) from 55 in 1973 to 96 in 1977. Production of export crops continued to decline in the interim largely as a result of low producer prices and other disincentives inherent in the practices of the commodity boards.13 Fortunately, the buoyancy of prices received by the country helped relieve the foreign exchange constraint oA produztion. At the same time Tanzania also greatly benefited from foreign aid, which at the beginning of the decade amounted to slightly over 4% of the GDP; by the end it reached 13.7% of GDP, compared with 4.4% for sub-Saharan Africa as a whole. The continuing rapid expansion of social services and public admin- istration also provided an impetus to growth. 2.18 Macroeconomic imbalances also worsened during 1973-78. Government fiscal and monetary policy, which contributed in the short run to the pros- perity, was also one of the causes of the subsequent imbalance putting pressure on prices and weakening the external reserve position. Government expenditure outstripped revenues; fiscal deficits mounted, and the national debt rose from TSh. 2.2 billion at the end of 1973 to TSh. 6.5 billion at the end of 1978. During the same period the Bank of Tanzania holdings of short-term securities increased from TSh. 3.3 million to TSh. 2 billion. Money supply tripled, causing a more than threefold increase in the cost of living. 2.19 The trade deficit steadily worsened, leading, in 1974-75 to a severe foreign exchange crisis. To defend the reserves the Government resorted to quantitative import :estrictions, that included the introduc- tion of an all-embracing import licensing scheme. Certain products were "confined", i.e. they could be imported only by designated parastatals. 11/ IBRD: World Tables, 1987, pages 444-447. 12/ IBRDs 1987, Op. cit., GDP at factor cost, constant 1980 Tanzanian shillings. 13/ IBRD: 1987, Op. cit. , pages 444-447. - 9 - The restrictions (and a temporary coffee boom) permitted the Central Bank to rebuild its reserves, but with a loss of industrial production due to shortages of imported inputs. At the end of 1977--just when the coffee boom ended--the Government, at the urging of the World Bank, relaxed the restrictions, resulting in a loss of reserves and inviting the imposition of even stricter controls. A Period of Crises: 1979-1985 2.20 In the late 1970s and the early 1980s Tanzania suffered from a series of external shocks. The breakdown of the East African Community (1977) disrupted trade with Kenya and increased the burden of running transport services. The cost of the war with Uganda, from October 1978 through most of 1979, is sometimes estimated as high as US$500 million, or about 102 of Tanzania's one year GDP. The 1979 oil shock, and the conse- quent collapse of commodity prices also had a major effect on Tanzania: by 1981 the terms of trade index (1980=100) fell to 85 compared with the high of 140 reached in 1977. 2.21 The crisis sharply reduced the Government's revenues at a time of rapidly mounting obligations. The fiscal deficit was covered by borrowing from the Bank of Tanzania, and, as a consequence, between the end of 1978 and the end of 1979 Ml rose from TSh. 6.8 billion to TSh. 10.4 billion. In 1979 the currency was devalued by 102. This was not enough to restore equilibrium, but the Government resisted further devaluation. 2.22 The terms of trade deterioration reduced the profitability of export-oriented agriculture. The adverse effect was compounded by currency overvaluation. The situation was further aggravated by the pricing poli- cies of parastatal monopolies entrusted with the purchase and export of crops. To reduce losses caused in part by their inefficiency, the parasta- tals reduced crop purchase prices. Farmers abandoned their plantations or switched to domestic food crops, thus aggravating further the balance of payments situation. 2.23 To cope with the balance of payments crisis, the Government re- sorted to quantitative import controls. The licensing system, usrd ini- tially to limit "non-essential' imports was gradually extended to 4aterme- diate inputs used by industry and agriculture. Only the parastata.s that ranked high on the priority list received adequate quotas; the production of most of the industrial enterprises as well as that of agriculture was severely handicapped. Foreign currency allocation and financiil repression further insulated enterprises from the market, while increasing their de- pendence on administrative decisions. 2.24 The lack of imported inputs led to a general decline of economic activity, and to the deterioration of the transport system and of other public services. Tanzania became progressively less capable of "absorb- ing" new projects, and partly as a consequence foreign aid, most of which - 10 - was tied to specific projects, was reduced. This further aggravated the Tanzanian crisis. Tanzania's debt burden became unmanageable. According to Central Bank data,14 as of end of September, 1982 Tanzania had US$300 million in arrears on short-term and US$50 million on long and medium term debt, while exports totaled ca. US$600 million per year. Policy Re-Orientation 2.25 Following three years of deepening economic crisis the Government announced "survival plans" in 1980 and 1981, both based on highly optimist- ic expectations regarding the recovery of exports and the ability to im- prove economic performance through stringent controls, while avoiding sig- nificant reorientation of policies. Specifically resisted were devaluation and fiscal restraint which the IMF set as conditions of its support. The crisis deepened, and in July 1982 the Government launched a three year Structural Adjustment Program (SAP), the aim of which was to: (i) achieve a better macroeconomic balance, (ii) provide better incentives to agricul- ture, and (iii) improve the efficiency of parastatals. The 1984185 Budget included major adjustment measures, including a 35Z devaluation (second in two years) and a 40-60Z increase in agricultural producer prices. Institu- tional changes included the disolution of crop marketing parastatals and the re-establishment of rural cooperatives, but export marketing boards were retained. Exporters were given the right to retain a fraction of their foreign exchange earnings for importation of approved articles. The most significant change was made to satisfy conditions of a World Bank loan: the grain purchasing monopoly of the National Milling Corporation was abolished. 2.26 The crisis brought to the fore pragmatic political elements will- ing to resort to "orthodox* remedies even at the cost of some departures from the Arusha principles, and, in 1986 the Government adopted an Economic Recovery Program (ERP) developed in consultation with the IMF and the World Bank. Under the ERP the Government committed itself to adhere to IMF guidelines on the fiscal deficit, and the exchange rate. The ERP also accelerated the program of domestic price decontrol, started under SAP; and continued to raise agricultural producer prices and to expand the foreign U exchange retention schemes. Notably, there was no reversal of the emphasis on public sector production, instead considerable attention was devoted to the need to improve efficiency. The Economy Since 1985 U 2.27 Since 1985 the Tanzanian economy has been showing signs of a grad- ual turn-a-round. Preliminary data for 1986 indicate GDP growth of 3.4% in that year. Service sectors and agriculture producing local food seem to have been the main sources of this growth. Although eAport earnings in- creased in 1986 due to the resurgence in prices of primary exports, real exports actually declined slightly. The structure of domestic demand has 14/ As reported in a memorandum from, Senior Economist EAIDA to Chief, EAIDA, dated October 16, 1982. U m begun to shift toward more private consumption and less government consump- tion. and the share of gross domestic investment has begun to increase. Unfortunately, with the adjustment in exchange rates price pressures are becoming more obvious. But with the increasing import support by donors the outlook is for continued relaxation of input constraints and gradual recovery of industrial production. Some Comments on Tanzania's Strategy 2.28 The goal of Tanzania's strategy was nation building rather that just economic development. The aim was to transform disparate, scattered people of heterogeneous tribal backgrounds and different languages into citizens of a modern state, to give that state an identity internationally and regionally, to make it genuinely independent, and to remove the last vestiges of exploitation of the indigenous population. High priority was given to investments which were to benefit its land-locked neighbors, to adult literacy and universal primary education, and to health care for all, without special regard to economic costs. 2.29 In retrospect, there were important inconsistencies between Tan- zania's national development and economic development objectives and strat- egy. An economic development strategy requiring abundant skills and entre- preneurial talent was not consistent with the national indigenization pol- icy which provoked the exodus of expatriate and Asian professionals, tech- nicians and businessmen. Similarly, restrictions on the employment of hired labor imposed to avoid exploitative inter-class relationships not only undermined large scale agriculture but complicated the creation and mobilization of an industrial labor force. The application of an incomes policy with a maximum and minimum wage compressing the wage range was a disincentive to the investment in skills, while impeding the ability of the public sector (where the policy was most effective) to attract and retain the competent administrative cadre which a "public sector led" strategy of development required. In addition, the strategy of industrialization in- tensive in its requirement of imported inputs was inconsistent with poli- cies which failed to give adequate emphasis to foreign exchange earning activities. Perhaps most serious of all Tanzanian Socialism took a highly ambiguous attitude toward private enterprise. The private sector continued to account for a significant share of economic activity, yet it did not receive adequate attention in national planning. As a consequence the private sector could not obtain necessary resources, leading to a loss of momentum and to eventual decline.. 2.30 The single most disruptive factor was the rapid pace of reform. Within five years three-quar.ers of the population was relocated under the villagization program; public administration was decentralized; peasant farming was transformed into block farming and later replaced by communal farming; cooperatives were assigned additional functions then later re- placed by parastatal organizations; marketing and distribution was trans- formed and even private village shops were closed 'r nationalized. Mean- while, the manufacturing sector was being systematically transformed into - 12 - one with ownership and control vested predominantly in parastatal compa- nies, and the bulk of new industrial investment was being undertaken through newly established state owned enterprises. A major misjudgment was to replaca the market mechanism by planned resource allocation, especially in a situation where planning and administrative capacity was inadequate. Clearly, the pace of decision-making and action did not fully take into account the absorptive capacity and the ability to implement reforms. 2.31 The parastatals, through which the Government has sought to con- trol the economy, generally have been a asly inefficient. Many have been a financial burden to the budget, and Axe distortions caused by the poli- cies and procedures of most has been an economic burden to the sectors within which they have operated. Government's efforts to reform parasta- tals, prompted mainly by the financial burden, have focussed on strengthen- ing Central Government's supervision and control. In 1983 new rules and guidelines were laid down in order to reduce waste and improve cost con- sciousness and the number of parastatals was reduced by merging some with other agencies and by closing others. However, until the recent joint study with the World Bank the economic burden had received scant attention.15 2.32 Tanzania's strategy, by dint of its ambitiousness and its pace, implied a considerable total requirement for financing from all sources. In the sixties sources alternative to the lank were not abundant. There was reluctance to help the newly independerr- country which had poor rela- tions with the U.K. and the Federal Repu'r ic of Germany--former colonial powers in Tanzania. In the early seventi the flow from bilateral donors grew rapidly, but since the Bank had already developed a reputation for infrastructure financing, Bank finance was viewed as complementary to that from other sources. Thus there was a strong demand for Bank financing throughout the sixties and most of the seventies. The slow build up of Bank lending in the sixties reflected the time required to build up a pipe- line of identified projects. In the seventies, about the time when the demand for financing for infrastructure started to dry up, Tanzania shifted emphasis to the productive sectors. Bank experience in African agriculture built on its -significant staff complement of former colonial officers al- lowed it to respond with assistance to identify projects. In 1974/75 the Bank extended to Tanzania a program loan to help overcome a balance of payments crisis, and, with this positive experience, the Government applied for further Program Loans in the subsequent years 2.33 Toward the end of the seventies Tanzania 's demand for Bank fi- nancing shifted from agriculture to capital intensive industry built within the basic industries strategy. However, after 1978 the rapid increase in donor support especially to the industrial sector and the deviation of national attention to the war with Uganda very probably tended to reduce demand for Bank project lending. The reduction of donor support after 1980/81 and the renewed pressures on the balance of payments due to the - 15/ World Bank: Parastatals in Tanzania - Towards a Reform Program; Report No. 7100-TA, July 27, 1988. - 13 - second round of oil price increases in 1979 as well as the deterioration in the terms of trade led to a resurgence of demand for Bank financing by Tanzania in the eighties. 2.34 The scope and pace of reforms called for the use of high technical and administrative skills. Given the shortage of local specialists there was an increased demand for outside advice. However, the Arusha strategy had strong ideological overtones. In essence it represented an attempt at designing a viable development approach that respected the customs and values of traditional African society, with its focus on the well-being of the group or tribe and on the holding of resources (land) in common. This meant that the advice that was welcome would have been mostly technical and ideologically neutral--limited mostly to projects. Advice on strategy that was not based on a profound appreciation of the African ethos would have been suspect. What's more, non-alignment, an important tenet of the Tan- zania philosophy of national development, implied a diversification of sources of advice and a cautious attitude to advice identified with a par- ticular ideological approach. These considerations suggest that the demand for advice from a multilateral organization like the Bank, founded and predominantly directed b- western capitalist nations and located in a capi- talist free-enterprise e -nomy would have been limited mainly to the tech- nical. Indeed, it was not until the balance-of-payments crisis at the time of the first oil price shock that Tanzania looked to the Bank for advice on issues of national economic management. Even after that, Tanzania contin- ued to give much weight to advice from multilateral organizations with more global membership than the Bank. In sum, it seems reasonable to conclude that the Tanzanian strategy influenced both the total and mix of advice desirable from the Bank in the direction of the technical relative to pol- icy advice. III. EXTERNAL ASSISTANCE AND AID COORDINATION Review of External Assistance and its Coordination 3.01 Since its independence in 1961 Tanzania has been the recipient of substantial foreign assistance from many bilateral and multilateral sources. Foreign assistance financed about 20% of the Development Budget during the First Five Year Plan 1964-69. This rose to 40Z during 1970-75 and to almost 60% during 1976-81. Although aid levels peaked in 1981 for- eign assistance remained an important source of support for the Development Budget and the major component of external capital inflows. Official de- velopment assistance between 1970 and 1984 has been estimated at nearly US$7 billion in constant 1983 Dollars, accounting for over 80Z of net offi- cial inflow of external capital. Annual disbursement of development assis- tance (not including Socialist Bloc sources) reached a peak of over $660 million in 1981 equivalent to 11.5Z of GNP, compared to $150 million in - 14 - 1970 equivalent to 42 of GNP. At $32 per capita in 1981, Tanzania, for its size and population, was among the highest aid recipients in the world.16 The grant component of assistance increased from about 20% in 1970 to over 80% in 1981. Between 1981 and 1986 aid flows declined by at least a half, reflecting changing political and economic circumstances in the source countries and a certain measure of disenchantment with Tanzania's national economic management and performance. Since the agreements reached between Tanzania and the IMF and Bank in 1986, and the reactivation of the Consul- tative Group (CG) in the same year flows of foreign assistance are once more on the increase. 3.02 Tanzania has been receiving assistance from over forty sources. Although precise figures are unavailable for the period prior to 1970, the major sources of aid during the First Five Year Plan 1964-69 were USA, UK, Sweden and IDA. Canada began to assume greater importance toward the end of the Plan. There was a substantial inflow of aid from the Peoples Repub- lic of China in 1966167. Between 1970 and 1984 multilateral sources pro- vided 22% of total development assistance (not including Socialist Bloc sources), of which the Bank provided nearly 10% of total or 40Z of the multilateral. Among bilateral sources, Scandinavia (Sweden, Norway, Den- mark, Finland) was most important accounting for over 30Z of total, with Sweden alone providing nearly a half. The Federal Republic of Germany and Netherlands constituted an important second rung of donors, each contribut- ing just over 9Z of total. Canada, USA, and the UK were in a third group clustering around the 6% of total level, while Japan, OPEC countries and Italy formed the next important group. The remainder was accounted for by a large number of countries each contributing less than one percent of total. 3.03 The composition of foreign assistance has changed over time. While most aid has been given as project aid there has been an increasing shift toward import support/commodity assistance, especially since 1980. It is currently estimated that around 30Z of total assistance in 1986-87 was non-project aid. The aim of import support has been quick procurement of raw materials and spare parts to rehabilitate capacity mainly in indus- try, transport, and agriculture. Food aid has also been an important com- ponent of some donors programs, e.g., EEC and USAID. The sectoral orienta- tion of aid has also changed over time. In the sixties and early seventies most project assistance was directed to the agricultural and transport sectors. During the second half of the seventies the direction of assis- tance to productive sectors shifted from agriculture toward industry and energy. A significant share of foreign assistance, particularly from Scan- dinavia, has been directed to the social sectors and to rural development. Primary education has attracted help from Denmark, and rural development from the Bank, Germany, Scandinavia, EEC, USAID and other sources. 3.04 Foreign assistance to Tanzania has been on favorable terms and with minimum controlling conditions. During the early seventies the ratio of grants to loans was about 1 : 2; subsequently this ratio has been moving 16/ Dijkerman, Dirks Donor Assistance to Tanzania Past Trends and Recent Developments; January 1987. (Unpublished paper) - 15 - in the direction of 1 : 1. Since 1980 a number of sources, primarily Euro- pean, have converted all or part of their earlier loans to grants and many have continued mostly on a grant basis. At the same time Tanzania has been regarded as one of the most vocal developing countries in international fora about the conditions attached to aid. It has repeatedly called for a restructuring of the Bank and Fund, with more input from the developing countries and less conditionality in lending. 3.05 The poor performance of the Tanzaniat economy since 1980 in juxta- position with the large amount of foreign assistance over many years has provoked serious concerns about the effectiveness and impact of this assis- tance. Among the concerns is that aid flows may have come to determine to a large extent a structural pattern of ezonomic and social development that may well be non-viable in the absence of significant structural adjustment. Large aid flows with minimal conditions have encouraged the country to embark on ambitious development programs without adequate regard to thi limitations on skilled manpower and other resources. While some dono-s prefer to stress that aid transfers were based on Tanzania's requests, a large part of the project studies were undertaken on the initiative of donors or directly by them, and high aid figures gave donors a significant influence in setting development priorities. Another concern is that donor-financed investment has contributed to pressures on the GOT's recur- rent budget, because of maintenance and operating costs and the creation of a plethora of public institutions. This has been especially severe since the foreign exchange crisis and attendant restriction of imports has cur- tailed the buoyancy of revenues. Yet another concern is that advice by donors did not always push in the right direction, and was not always based on information sufficiently reliable for policy formulation. What's more, donors did not always speak with one voice; advice given by the Bank and Fund missions was often contradicted by missions of the ILO and FA0.17 3.06 Many donors are now assessing the recurrent budget implications of their programs as well as evaluating their experience in order to find ways to improve efficiency and cost effectiveness. GOT's administrative capac- ity is another area of concern. The Tanzanian administration has not been able to control, absorb, and monitor effectively the large number of aid programs availuble to the country from so many sources due to the perennial shortage of skilled managers in the civil service. Yet another area of concern and one that has attracted much attention is the inadequacy of aid coordination and the need to develop this capacity within the recipient country so that it can eventually take the lead role. These concerns are leading donors to study and attempt many adjustments in their programs, as well as to become sensitive to the macroeconomic context within which their programs must fit. 171/ Collier, Paul: "Aid and Economic Performance in Tanzania"; Institute of economics and Statistics, Oxford University, August 1987. (Paper presented to the Aid and Development Conference, Talloires, France, Sept. 1987). - 16 - 3.07 Aid coordination arrangements in Tanzania have developed slowly over the years and even now an adequate system is not in place. Effective coordination requires at least three sets of consultations: (a) within GOT, between ministries; (b) between GOT and the donor community; (c) among donors.18 From the early sixties the Ministry of Planning and Economic Affairs has been formally responsible for within Government aid coordina- tion as an outgrowth of its role in identifying sources of financing for the development plans it was charged with preparing. More recently in 1986 the Ministries of Finance and of Planning were combined into one (MFEAP) and a new Deputy Principal Secretary's position was created to improve the coordination and allocation of external finance in general and donor aid in particular. In November 1987 GOT met donors and agreed to set up a formal structure for coordination between GOT and donors with regular quarterly meetings chaired by the PS/MFEAP, and with the UNDP serving as secretariat for the time being. Until then GOT/donor coordination had typically been on a bilateral basis, mainly because GOT preferred not to deal with donors as a group in order to maximize aid and because it wished to avoid the risk of donors ganging up on the Government and criticizing its development strategy. At the sectoral and sub-sectoral levels efforts at coordination between GOT and donors have taken place with more readiness, and there is a general impression that meetings on specific topics have improved to the point where they are accepted as useful by both sides. Experience suggests that coordination has been more useful the more the topic is limited to the project level. Thus more structured and substantive coordination takes place sometimes at the initiative of the GOT, e.g., transport sector, rural roads, fertilizer supplies, Tanzania Railway Corporation, Mufindi Paper, etc., with participation from the relevant ministry, and, sometimes at that of donors without GOT involvement, e.g., forestry. Inter-donor coordina- tion has existed since the early seventies, in a more or less regular forum with informal aeetings convened by the Bank's kesident Mission and the UNDP and attended by thirty or more donor representatives. These meetings have no set agenda, but provide an opportunity for a rather unstructured ex- change of information. There is some inter-donor coordination within sub- groups of the donor community with similar interests, e.g. the Nordic coun- tries. 3.08 The major obstacles to more effective aid coordination with the GOT lies in the weak administrative capacity and the consequent overburden- ing of a few key people. This shows up in the quality and timeliness of preparation of detailed sector plans and the Public Sector Investment Pro- gram. Also lacking or of poor quality is a program of technical assistance requirements by sector. Diversity of donor procedures and the large number of donors places additional burdens on the GOT's limited coordination and administrative capabilities. Coordination among donors is constrained by the fact that some do not think greater coordination is in Tanzania's in- terest, and because some give high priority to their commercial and politi- cal interests and see themselves in competition with other donors. The principal obstacles to coordination between the GOT and the donor community 181 OECD, Development Assistance Committee: Aid Coordination - Tanzania Case Study; Paris, October 1937.(Mission Report) is percpived by many to be the lack of clarity in the lines of communica- tion between individual line ministries and donors. This is due partly to the fact that inter-ministry consultation does not always occur and partly to the lack of clarity as to how ministry priorities fit into overall na- tional aid objectives. The result of these shortcomings at all levels is that the process is characterized by duplication, confusion, slowness and inefficiency, in turn leading to far less that optimal effectiveness in the deployment and use of available assistance. Implications of External Assistance for Bank's Role 3.09 The massive amount of aid that Tanzania has received from a large number of sources has meant that the Bank accounts for a relatively small share of financing for the development budget and of total capital inflow. It also means that it is but one of many sources of advice. The implica- tions for the Bank's role are that by acting alone it can have little lev- erage in policy discussions and that in its advisory and lending operations coordination with other donors becomes essential. The Bank has been able to compensate somewhat for the lack of leverage by organizing and chairing the Consultative Group for East Africa and later for Tanzania, and by being W the leading source of data and analysis of the Tanzanian economy. This has become more effective as concern has shifted from development projects to structural adjustment focussing on macroeconomic and sectoral policies. The relative paucity of well identified and prepared project proposals at any given time and the constraints on implementation capacity have made coordination with donors important in planning the Bank's lending program. This coordination has resulted in Bank/donor joint support for some proj- ects, Bank assistance in project preparation of projects for support by donors, and donor technical assistance in support of Bank financed proj- ects. 3.10 The coordination of Bank activity with that of other donors is not the same thing as aid coordination as the term has been used elsewhere in this chapter. The aim of coordination of Bank operations is to maximize the effectiveness of the Bank's resources, while the aim of aid coordina- tion is to maximize the effectiveness of external assistance. While the Bank may be considered well placed to organize aid coordination this role is not implied by the amount of aid or the diversity of sources. The Role of the Bank in Aid Coordination 3.11 The interest of the Bank in external assistance to Tanzania has been mainly in mobilizing external resources for domestic investment, and to a much lesser extent in coordinating assistance to ensure its effective utilization. Emphasis of Bank economic and sector work in this area has been on the estimation of the external resource gap assoc-ated with assumed levels of desired GDP growth and investment. The feasibility of filling this gap is judged on the basis of projected private and public inflows, and attempts are made to identify the sources of flows to the public sec- tor. In order to "firm up" the identity of these sources the Bank consults with donors. In 1968 the Bank held che first meeting of a Consultative Group for East Africa to review the development problems and prospects of the three EAC members--Kenya, Tanzania and Uganda. A second meeting of the Group dealing specifically with Tanzania was held at the end of April 1970. The meeting focussed on the urgent need for skilled and experienced manpow- et and for capital aid. The East African Consultative Group met again in 1973 and 1975. During this period the general picture for external assis- tance to Tanzania remained favorable, with aid commitments showing rapid growth. However, in 1974 the Bank projected that due to slow disbursements inflows would be inadequate to fill the resource gap during the next few years, and at the 1975 Group meeting urged donors to simplify procedures for drawdown of aid. The next Group meeting on Tanzania was held in 1977 when the resource gap had been considerably reduced from the 1975 level as a result of higher export volumes and booming coffee prices. P.ojected aid flows through 1980 based on the indicative programs of major donors re- viewed at the meeting were deemed adequate to cover a resource gap pro- jected to triple by 1979. The next Group meeting for Tanzania was I.eld in June 1986, in response to the GOT decision earlier that year to introduce a new Economic Recovery Program (ERP). The new program, announced in the 1986/87 budget and presented at the meeting, received wide support from the international community. In presenting the Multi-Sector Rehabilitation Credit to the Board in November 1986 the Bank undertook to hold further Group meetings for Tanzania on a regular basis and stated that "the expec- tation is that, provided the momentum of policy reform is maintained, addi- tional resources can be obtained to support Tanzania's recovery effort". Another meeting of the Group was held in July 1987. 3.12 Since the early seventies there have been pressures from the donor community for the Bank to expand its involvement in the aid process. The 1974 CPP records that "several bilateral donors and the Tanzanian Govern- ment itself have expressed the wish that the Bank [should] play a leading part in the preparation of productive rural development projects on a re- gional or district basis suitable for parallel or joint financing". The Bank acceded to these requests by providing technical assistance for iden- tification of rural projects, project preparation and implementation. Both the Bank's Regional Mission in Nairobi and the Resident Mission in Dar es Salaam were seen as having a vital role to play in providing and coordinat- ing this assistance. 3.13. Toward the end of the seventies as Tanzania's need to make struc- tural adjustments in response to fundamental imbalances in its economy became widely recognized, it became generally agreed in the donor community that the Bank was best able to do the necessary economic analysis for the design of a recovery program. It was also recognized that the bulk of the financing requirement for recovery would have to be met by additional for- eign assistance on concessional terms and increasir. \y in the form of non- project support. A number of traditional donors expressed willingness to support on condition that a comprehensive program of economic rehabili- tation and recovery was implemented. Foreign assistance and policy reform became closely linked. The development program had to be reduced, but with about ninety percent of the projects counting on some form of foreign assistance, the issue of priorities became critical. With resources being too scarce to allow duplication or proliferation of projects the decisions as to which projects should be done and which donor was to do which project became important, and it was to the multilaterals that the donors and Tan- zania looked for essistance in this coordination. 3.14 The UNDP and the World Bank, the multilaterals with an important permanent presence in Tanzania, have tended to share the lead role of spon- soring aid coordination, alternating in chairing the monthly meetings of donors, and participating in sectoral meetings on the basis of each leading when the study or other material emanated from its technocrats or as a result of its spoLsorship. They also share a lack of assertiveness in their aid coordination role, which partly reflects sensitivity to the GOT's traditional reticence to countenance or participate in structured aid co- ordination arrangements. 3.15 At the Consultative Group meeting in 1986 it was recognized that better aid coordination was necessary to facilitate the needed structural adjustment in Tanzania. While conceding that there was still considerable discussion among donors and within Tanzania on exactly how to proceed , the general impression was that the UNDP and Bank had so far not played a major role in helping to improve coordination between donors and the GOT, specifically failing to make significant efforts toward institutionalizing coordination activities. 3.16 Referring specifically to the Bank, they did not believe this was in line with expectations fostered by a 1984 Bank commitment to increase its coordinating activities in Sub-Saharan Africa by boosting staff levels in the field to assist countries in public sector investment programming. In interviews with the donor representatives in Tanzania the OED mission was told that the Bank would need a much larger staff in the Reqident Mis- sion to undertake the coordination function effectively. Many bilateral donors have between 10 and 15 project implementation staff while the Resi- dent Mission has three--the Resident Representative, his Deputy, and one agricultural expert. With other responsibilities in relation to the Bank's lending program, the Mission cannot sustain anything more than a superfi- cial dialogue with bilateral donors. Evaluation of the Bank's Role 3.17 The Bank's performance in aid coordination has been very limited for a number of sometimes good reasons. One important reason is that aid coordination has only fairly recently has been assigned high prioLity since the country has been in a foreign exchange crisis and aid levels have fal- len thereby making aid relatively scarce and causing concern that it should not be wasted. Other reasons inhere in the general fuzziness surrounding the views of donors and of the GOT on the exact content of coordination and on its desirability. Donors talk about the need for coordination but their meetings are very informal with no agenda or minutes and providing little more than an opportunity to exchange information. Then there is no consen- sus on the approach to aid; some argue in favor of a move away from the bilateral to a consortia approach, while others view the bilateral approach as adequate with minimal changes. Perhaps the overriding reason for the limited role of the Bank in coordination is that the main emphasis of the Bank has been on mobilizing donor support, which when done on the basis of pledges of support to an investment program involves some coordination characterized by allocation of projects among various sources of financing. However since the end of the seventies a larger share of aid has been in the form of commodity aid, most of which is not directly linked with or coordinated through the public investment program. Recently some donors have provided technical assistance in MFEAP to help coordinate the inflow and allocation of commodity aid. 3.18 Indications are that with the commitment to hold Consultative Group meetings more frequently since 1986 the role of the Bank in helping the preparation of the PSIP has expanded and this vehicle for coordination has become more important. Also, coordination has become more effective in practice as the frequency of meetings results in better follow-up of donor pledges. The recent move by GOT to establish a formal structure for aid coordination suggests that the time has passed for a lead role for the Bank in this area. Bank efforts at aid coordination should henceforth be only in support of the Government's. Given that the UNDP favors Bank dominance in countries belonging to consultative groups chaired by the Bank and UNDP dominance in those belonging to round tables chaired by the UNDP, the Bank should consider taking on the secretariat functions temporarily assigned to UNDP if the latter does not wish to continue them on a permanent basis. Obviously, additional staff would have to be provided to the Resident Mis- sion to undertake these functions. IV. BANK STRATEGY FOR TANZANIA Introduction 4.01 The purpose of this chapter is to provide a brief overview of the Bank's strategy for Tanzania, specifically to see how it evolved and the main factors which influenced it. Bank strategy for any country is deter- mined against the background of the Bank's perception of its role in devel- opment generally, making the review of this perception the logical starting point for the examination of the strategy for Tanzania. Bank strategy is reflected primarily in the lending program and the dialogue based on eco- nomic and sector work. In the lending program, it will show itself in the size and growth over time, the cost of loans as determined by the blend of IBRD and IDA financing, in the allocation between project-based and policy- based loans and credits, in the sectoral emphasis of project lending, and in the project content of support to individual sectors. In the dialogue, strategy will be reflected in the intensity and the relative focus on proj- ect related advice compared with advice on macro and sectoral policy. Bank strategy may also be reflected in efforts to mobilize and coordinate exter- nal assistance. The evolution of Bank strategy is traced by reviewing lending and advice, but the analysis of strategy requires the examination of the determinants of lending and advice and of the strategy determination process within the Bank. Bank's Role and Development Strategy 4.02 The Bank's perception of its role has been closely related to the dominant view in the academic literature regarding what is important for promoting development. At the time of the founding of the Bank this view focussed on capital investment as the source of growth. Since then greater recognition of the importance of human development, attention to the social goals in addition to growth, and an increasing awareness of the need for appropriate policies and institutions have broadened the view of develop- ment needs and priorities. The Bank was created to provide long term fi- nancing of capital investment, and lending has been the focus of Bank work. However, Bank lending has been changing over time to provide support to a wider variety of projects and to support policy reform and institutional development. Bank economic work, which initially centered on the assess- ment of development potential and the identification of appropriate proj- ects for investment, has been giving increasing attention to the analysis of the policy framework for achieving full and efficient use of invested capital and to the overall macroeconomic balances and stability of the developing economy. These changes reflect the Bank's changing perception of its role from that of lender of last resort to that of development and national economic management advisor and mobilizer of development finance. 4.03 Operationally, the changing role has meant the introduction of policy-based lending as a regular component of Bank lending. Whereas the Articles of Agreement stated that "loans shall, except in special circum- stances, be for the purpose of specific projects", in the 19709 the Bank made Program Loans ostensibly providing support to the public sector in- vestment programs, overall or in specific sectors. With the main emphasis being on quick disbursement, these Program Loans were in fact balance of payment support, and were not an effective vehicle through which to pursue fundamental longer term policy change. The oil price crises, and instabil- ity in traditional international commodity markets reinforced the awareness in the Bank and in the development community that the distorted policy frameworks of the 1960s and 19709 would be unsustainable in the 1980s. "It is for these reasons--i.e., the urgency of policy reform and the limited effectiveness of project lending combined with policy dialogue for support- ing and monitoring reform--that the Bank introduced Structural Adjustment Lending (SAL) into its operations in 1980".19 Quick disbursement of balance-of-payment support is not the primary focus of Bank's attention under its SAL. Instead, funds are to provide a financial bridge while policy reform is taking effect. 4.04 Even before the SAL was formally introduced in 1980 and the Board agreed to a ceiling on the share of Bank lending which could be in this form, the main objective and the required features were clear. Limitations on its use were appreciated later. The Bank introduced SAL purely with the aim of giving greater urgency to its concerns over policy issues relating 19/ Stanley Pleases "The Hobbled Giant - Essays on the World Bank"; Westview Press, Boulder and London, 1984. to structural adjustment and a more systematic involvement in programs which address these issues--in short to give it leverage in procuring pol- icy change. The principal features of the SAL that are particularly rele- vant in this regard are;(i) comprehensiveness of coverage both in terms of macro and sector issues, (ii) single-minded concern with policy reform, and (iii) detailed articulation of precise changes in policy to be implemented by government. What the Bank did not foresee in the late 1970s was that many governments would be unable to formulate and implement the reform programs envisaged under a SAL. Also, the Bank did not foresee that many governments, finding the implied extension of Bank influence in policy- making offensive to national sovereignty, might be unwilling to commit themselves to the Bank to implement such programs. 4.05 The introduction of the SAL represented not so much a dramatic change in lending as it did an important change in the Bank/Country dia- logue. Although the Bank had always attributed much importance to its economic work and the dialogue based on it, the policy Sialogue before SAL rarely went beyond "gentle persuasion" at the political level and technical discussions with economists and administrators at the official level. Discussion of overall development strategy and macroeconomic issues had lower priority relative to project issues in the dialogue because the lat- ter were operationally more significant to Bank staff. The Bank's priority was its lending, and lending was for projects. Much of the dialogue con- cerned the selection of appropriate projects, project conditionality, and the problems of implementation. This type of dialogue tended to be non- confrontational, and even where disagreements arose over particular proj- ects they would not sually affect the total relationship between country and Bank as the issuies generally did not involve questions uf comprehensive policy change. 4.06 Before the change in Bank role associated with SAL, there were gradual shifts ir. Bank strategy in response to evolving views on develop- ment. The emphasis in lending in the 1950s was mainly on infrastructure. By the 1960- lending to the productive sectors--agriculture and industry, and for education became increasingly important. The Bank's 1968-73 lend- ing goal called for a tripling of support to education and a quadrupling to agriculture. The planned mix of lending for 1974-78 reflected the Bank's view that 'the growth is not equitably reaching the poor; and the poor are not significantly contributing to growth'.20 The focus of lending was to attack the problems of absolute poverty by increasing the productivity of those comprising the bottom 40% in the income distribution, the majority of whom were in rural areas and mostly involved in small scale peasant agri- culture. While recognizing that small farmers cannot prosper unless there is growth in other sectors, it was considered unwise to concentrate on the modern sector in the hope that its high growth would filter down to benefit the poor. Furthermore it was the Bank's view that without rapid progress in small-holder agriculture there was little hope of achieving long-term stable economic growth. Although frankly admitting that "neither we at the 20/ Robert McNamara: Address to the Board of Governors of the World Bank, Nairobi, Kenya; Sept. 1973. Bank, nor anyone else, have very clear answers on how to bring improved technology and other inputs to over 100 million farmers" and "we will have to improvise and experiment, and if some of the experiments fail, we will have to learn from them and start anew", agriculture/rural sector was to receive 42Z of lending, and about 70Z of the operations were to have a small-holder component.21 The details of the program laid out at Nairobi are particulirly interesting in a review of Bank/Tanzania relations in the extent to which the program parallels and complements the Tanzanian ap- proach at the time. The Bank stated that it was prepared to: * assist the reform of agricultural financial structure to bring credit to small farmers; * invest in large irrigation projects, and support on farm infra- structure; * support non-irrigated agriculture, including livestock and dairying; * finance the expansion of training facilities for extension agents; * finance multi-purpose rural development projects; * assist land and tenancy reform programs; * do more financing of agriculture research to develop an appropri- ate technology; * take account of pressing needs of rural areas in lending for in- frastructure. Indeed there is evidence to suggest that the Bank's policy statement at the Nairobi Annual Meetings (Sept. 1973) may have benefitted from an awareness of the Tanzanian approach. The postscript (dated April, 1973) to the Tan- zania Country Program Note ends with the sentence "These Government efforts deserve the attention of the Bank and the experience in Tanzania may be of great value in the formulation of Bank projects in other countries". 4.07 The Bank's strategy in the sixties and seventies called for a significant increase in total lending, and a geographical shift in empha- sis. For 1968-73 the goal was to double total lending comnared with the previous five year period 1964-68. This target was surpassed in current terms but exactly met in real terms. Within this overall target, it was intended to triple the level of lending to Africa, and this was also achieved. For the 1974-78 the global target called for a 40% increase in real commitments over the previous period. The rationale for the increas- ing level of lending was based on a view of the main difficulties faced by most of the developing member vountries, which emphasized (i) an insuffi- ciency of foreign exchange earnings from trade, (ii) an inadequate flow of 211 McNamara: Op. cit. Official Development Assistance, and (iii) an increasingly severe burden of external debt. The Bank's position was that "given the nature of this interrelated set of problems in our developing member countries...the Bank, far from relaxing the momentum of our operations over the next five years, must increase it".22 These difficulties were undoubtedly exacerbated by the oil price crisis in 1974, the subsequent recession in developed countries which were the main sources of ODA, and the weakening of international markets for the primary exports. After 1978, these very developments were to affect the outlook for Bank access to resources for lending, leading to moderation in the momentum of lending and to increasing emphasis on the effectiveness of lending and the required reforms in policy to bring this about. Evolution of Bank Strategy for Tanzania The First Ten Years 4.08 At the outset of the Bank's relation to Tanzania as a member coun- try, the emphasis of economic work and dialogue was on the assessment of the country's development potential and the elaboration of a recommended strategy for its development. In its 1961 Report of the World Bank Mission to Tanganyika the Bank outlined a strategy based on the improvement and transformation of agriculture.23 In the short to medium term extension of cultivation and agricultural improvements were expected to yield satisfac- tory growth, but over the longer term agricultural modernization would be essential to further development. The analysis and recommendations were not only concerned with growth. The emphasis on peasant agriculture as a potential "engine of growth" reflected economic as well as social goals. At a time when plantations occupying 1 percent of the land produced 45Z of export crops, a strategy based solely on economic efficiency might have dictated extending plantations. But Tanzanian plantations were European or Indian owned, while all peasants were of African stock. The P-aggestion to concentrate on peasant agriculture thus reflects a wish to improve the level of living of the African masses and to avoid racial and class polari- zation; and would have commended itself to the African leadership as an appropriate approach to national development of their recently independent country. 4.09 The report also called for a mixed system, in which the State would play a modernizing role and the economy would be guided by a Develop- ment Plan. To improve agriculture the Government would provide better extension services, provide credit, and promote pilot community development schemes. To effect transformation the Government would undertake research, invest in water/irrigation/flood control and create planned settlements. Such an approach putting the responsibility for development in the locus of 22/ McNamara: Op. Cit. 23/ IBRD: Economic Development of Tanganyika, Op. cit. political power rather than in traditional institutions controlled by eco- nomically powerful groups would also have been very much i% line with the thinking of the political leadership. 4.10 This early Bank economic work had significant influence on the first two Plans. Bank appraisal of the 1964-69 Plan in 1967 revealed no change in its views on Tanzanian development since the 1961 report -- that agriculture should be given priority and that Government should play a significant role in expediting development.24 The Bank also reviewed the Second Plan 1969-74 and found that it "was in general well prepared, and both aggregate and sectoral targets appear to be more realistically based that those of the previous Plan... it would appear that the investment and output targets are, with some exceptions, fairly well-founded". The empha- sis on agriculture met with approval, though some doubts were raised con- cerning the advisability of trying to achieve the planned self-sufficiency in food, and concerning the expected rate of growth of manufacturing in view of the exhaustion of easy import-substitution possibilities.25 Significantly, the Bank's 1970 report which appraised Tanzania's economic development under the First Plan period (1964-69), the extent to which plan targets were met and the development strategy changes occasioned by the Arusha Declaration, and which examined the general framework, output and investment targets of the Second Plan (1969-74) ane key issues affecting various sectors of the economy, raised no alarm concerning the validity of the implied strategy. The Bank's earlier concern that adequate compensa- .ion be paid for nationalized property and that nationalization should be a once only measure so as to avoid the uncertainty and its effects on the investment climate, had apparently been satisfied by Tanzania's behavior in the three years since Arusha. Either the Bank failed to grasp the full import of the Tanzania strategy because its operational details emerged slowly, or it did not consider it a drastic departure from the original Bank approach which assumed a leadership role for the State. However that may be, the focus of economic work up to the early seventies was to ider- tify projects suitable for external financing; with only muted expressions of skepticism over the Tanzanian approach, and with concern more for the implications for lending than for economic performance. 4.11 The Bank's strategy for Tanzania during the sixties was clearly part of its strategy for East Africa. This strategy was essentially to assist in the development of an integrated regional economy with a large part of economic control "delegated" to supra-national authorities and institutions. The primary task in this process was seen to involve the development of an adequate transportation and communications network throughout the member states of the East African Community (EAC), and this the Bank was supporting by loans to the EAC for railroads, ports, and tele- communications. But there were wider implications for the degree of na- tional control of economic policy as integration progressed. With a common 24/ IBRD/IDA: Prospects for the Economic Development in East Africa, Africa Dept. , October 1967. Vol III - Tanzania, Part Two - Annex A Agriculture, p.i 25/ IBRD: Tanzania - Economic Development and Prospects; 1970 - 26 - trade regime, and unified monetary system some of the usual sources of policy distortion would not long be subject to decisions at the national level. The recognition of this fact may partly explain the rather limited dialogue during the sixties and early seventies, when the policy framework for Tanzanian development received little attention in discussions of Bank strategy. 4.12 The lending strategy of the Bank during the first decade of Tan- zania's membership was to build up its pipeline for direct lending, in addition to lending through EAC. Per capita lending increased rapidly. especially after 1968 when lending to Africa was targetted to triple that of the preceding five-year period. Lending was mainly to projects in in- frastructure--highways, power, and through EAC--railways, harbors, telecom- munications; and to agriculture and education. The blend of loans and credits was fairly hard, partly because all support to EAC was in the form of loans and because power projects also attracted IBRD financing. This blend was thought justified on the basis of Tanzania's economic perfor- mance, low level of debt, and the relatively soft terms of other donors. The 1970 Country Program Paper (CPP) said "Although creditworthiness con- clusions indicate that Tanzania could continue to incur some debt on con- ventional terms, it would nevertheless be desirable to increase the propor- tion of IDA lending somewhat further if the availability of IDA funds ex- ceeds the amount assumed in the program". The Next Ten Years 4.13 The period 1971 to 1981 was marked by dramatic changes in the Bank's strategy for Tanzania. The main changes were on the side of the policy dialogue and its supporting economic work. Although by 1972 there was some skepticism over the Government's approach and concerns over slow implementation and obvious constraints on absorptive capacity, the prevail- ing mood was highly positive toward Tanzania. In the 1973 CPP it was stated that "Our lending program for Tanzania is in harmony with the Gov- ernment's development priorities which are clear and in our opinion gener- ally well conceived. The key element in the Government's development strategy is to raise agricultural productivity through the improvement of services in rural areas. At the same time emphasis is placed on the promo- tion of communal responsibility for production and the welfare of the people on the village level. Another aspect of the Government's strategy for rural development is the concentration of development assistance in some of the poorest and most backward areas so as to gradually reduce re- gional income disparities'. Based on the coincidence of Tanzania's strat- egy with that of the Bank in its emphasis on rural development and orien- tation toward addressing the problem of absolute poverty, the Bank pro- claimed Tanzania a concentration country for its efforts in rural develop- ment. Economic work critical of aspects of Tanzania's strategy and poli- cies failed to influence the dialogue which was for a two-year period adu- latory and congratulatory, and which mainly focussed on the slow rate of transfer of resources that were being committed. n - 27 - 4.14 The economic crisis of 1974 resulting from widespread drought and the first OPEC oil price hike, provided the opportunity for an increased Bank/country dialogue on economic policy issues. The opportunity came when the Government requested a special Bank mission to study jointly with a Tanzanian task force the short- and medium-term effects of the oil price increase on the economy and the required policies and projects to adjust to the new situation. The Bank participated with the IMF and Government in preparing a comprehensive program of policy actions to address the crisis, and undertook a series of studies of the productive sectors to see what could be done to improve performance and to increase their export orienta- tion as a means of strengthening the balance of payments over the longer term. Tanzania took measures which the Bank regarded as impressive, and the Bank decided to provide further program assistance. 4.15 By the end of 1975, the Bank noted that while Tanzania had adopted measures which few governments in the world would be willing to undertake, it had also announced a number of medium term programs and social targets (universal primary education (UPE) and rural water supply (URWS)), which were inconsistent with the professed intention to shift resources toward directly productive activities and to restrain the growth of recurrent expenditure. In devising its strategy for Tanzania the Bank placed in- creasing emphasis on the view that the 1974 economic crisis did not arise exclusively from crop failure and import price increases, but long term economic trends determined by, and recent changes in, Government policies viz. low producer prices, forced villagization, inefficiencies in public sector services e.g. transport, sharp increase (over 40Z) in the minimum wage in may 1974 contributed significantly to the crisis and worsened the outlook for recovery. Among the three principal Bank objectives: support- ing Government's efforts to restore macroeconomic stability, maintaining access to decision-makers for Bank policy views and improving project im- plementation, increasingly higher priority was given to the second. Gov- ernment requested special studies--fiscal implications of UPE and URWS and other Bank studies on export policy and on the recently articulated Basic Industry Strategy, and discussion about the Program Credit all provided a useful opportunity for the Bank to raise its concerns about short term budgetary issues and long term problems. At the same time the Resident Mission was expanded to two professionals and given responsibility for the working level dialogue to improve project implementation. At the end of 1975 the Bank reported good progress in maintaining a channel for communi- cation of Bank policy views, and resolved that "this kind of involvement should be maintained in step with Government desires and responsiveness." [CPP in 1976.] The accompanying statement of Bank strategy stated that the Bank's goals over next year or two would be to: (a) encourage a program of consolidation (mainly restraint of public and private consumption, a slowdown of institutional change); (b) encourage certain policy reforms; (c) supplement other sources of quick disbursing foreign exchange; (d) increase effectiveness of Bank lending through better project implementation. - 28 - The strategy statement did not contemplate the possibility that Tanzania may not be responsive to all Bank policy views; but when in 1977 Tanzania did not rapidly agree to liberalize its import and foreign exchange re- gimes, the Bank made it a condition of the Program Credit which was ap- proved later that year. Bank strategy had shifted from gentle persuasion to leverage via use of conditionality. 4.16 The Basic Economic Report of 1977 drew together the conclusions of the various studies that had been done over the last three years and e- merged with a comprehensive analysis of Tanzania's development strategy, economic performance and outlook. Although the report was widely discussed with Tanzania and the Bank responded to the Government's concerns and crit- icisms, it was still perceived as hostile by some Tanzanians. The impres- sion was gained that the Bank was upset about Tanzanian policy; and there was concern that the Bank would insist on publishing it, and fear that the Bank would cut back sharply on lending unless the Government implemented the recommendations of the BER.26 4.37 The shift in Bank strategy was reflected in a Tanzania Strategy Paper prepared in the programs division in September 1977. The discussion of the "Policy Implications of the Basic Economic Report" started with this statement: "The critical question is how the Bank can obtain sufficient leverage through our operations to ensure that the Government gives ade- quate attention to the problems identified in the Report." The paper went on to state that in some cases, where Government also recognizes the prob- lem and is groping for an answer, it should be possible to have a meaning- ful policy dialogue. It added that there were other issues where the Bank thought it had some answers or where the Government wae pursuing the poli- cies, but in many instances the Bank could not easily get a handle on the issue through its ordinary lending operations. It was proposed that "in order to obtain a receptive hearing on these macro-policy and other diffuse issues, it is essential to have a larger core lending program which is not necessarily linked to particular sectoral policies." It justified this proposal by saying, "Leverage would be obtained not by directly linking a particular policy to a particular loan but by an implicit understanding that the overall size of this core lending program would be dependent upon progress in dealing with a wide range of policy issues." In summary, the proposal, in brief, is to use the core lending program as the functional equivalent of a program loan." The section concludes by saying "more at- tention must be paid to ensure that the lending program as a whole does transfer more resources--to provide policy leverage as well as to promote growth." 4.18 At the beginning of 1980, Bank strategy statements confirmed the approach outlined in the Region's 1977 paper, but vent even further in criticizing Tanzania's strategy and in formalizing Bank thinking on what 26/ Memo, Economist, CPIA EAN to Director, CPI EAN regarding Discussion of Bank-Tanzania Relations with Hassan Fazel [a staff economist in the Office of the President of Tanzania), dated June 1978. was to become Structural Adjustment Lending.27 It stated that "there is finally a need to recognize better than in the past the limitations of centralized administrative control over the economy"--rejecting its 1960. view favoring a state-led strategy and calling in question a basic tonet of Tanzania's development philosophy. Then stated Bank strategy in this way: "The support of this fundamental readjustment process, which should extend from the macroeconomic to the sectoral and project levels in the various areas of our involvement, should be at the center of our assistance strategy." Yet the Bank was not unaware of the resistance to the use of leverage. It noted that "...reaching agreement on these issues will not be an easy pro- cess. Strains and setbacks are to be expected as some in Govern- ment will interpret Bank Group advice in ideological terms, view- ing any recommendations as interference in Government operations." The related element of strategy--economic and sector work--was not ignored, and it was recognized that a series of comprehensive examinations of the key issues facing Government, including sectoral policies and manpower, would have to be undertaken in preparation for a renewed dialogue. Mean- while, the Bank recognized that in discussions with the IMF the Government had not been able to articulate its own stabilization program; that there were fundamental differences between the Bank and Tanzania on the causes and remedies for the economic crisis; and that Tanzania was not about to put forward a program as a basis for discussion of a structural adjustment loan. This meant that the Bank would have no effective leverage in policy matterc. Lacking credibility after the failed 1977 liberalization episodes in which Tanzania had lost nearly all its resources, and its unwillingness to consider further program support without linkage with an IMF agreement, and not having done updating economic work, the Bank did not put forward a draft program for Tanzania's consideration. Instead the Bank proposed to finance an outside team of experts (the Tanzania Advisory Group - TAG) acceptable to Tanzania to draft the essentials of a structural adjustment program. This was accepted in 1981. 4.19 The other element of Bank strategy--its lending, only partly re- flected changing Bank concerns during 1971-81. Commitments increased rap- idly after 1972 and continued to a peak in FY81. Notably commitments in- creased even after the Bank had serious misgivings over Tanzania's poli- cies. The above quoted statement in the 1977 strategy paper regarding the need for lending to transfer more resources in order to provide policy leverage gives an idea of the type of thinking that made for increasing 27/ CPP dated January 1980. 30 lending. The above-quoted memo of June 1978 provides another clue by stat- ing that "Given the Bank's commitment to increase resource transfers [os- tensibly to Africa128 and the prospects for lending in many other African countries, Tanzania is likely to continue to have a large program unless there is a drastic change in political or economic conditions." As late as 1978 the President of the Bank was of the view that "while Tanzania's com- mitment to equity with growth merited the level of lending proposed, this could only be justified over time if performance on ongoing projects were satisfactory"; a view justifying the highest priority to implementation. These reasons, and because the approach to developing a lending program- * -starting from proposals from Pro ects divisions--ensured that lending would have a "momentum of its own."29 Yet, there was reason to be concerned about lack of absorptive capacity which was never adequately addressed. A memo of July 1978 noted the need for a Bank lawyer to visit Tanzania to help sort out the legal steps to be taken in relation to a number of projects: "Assistance needed in Tanzania to help sort out those legal matters". A telex from the Nairobi Regional Office to Headquarters in April 1979 discussed the dimensions of the problem of availability of adequate and qual.ified manpower, its effects on absorptive capacity during the project cycle, and the need for measures to reduce the problem for Bank-financed projects. The loan officer in a memo to files in August 1979 wrote: "One of the major issues in this year's CPP on Tanzania is that of manpower over-commitment. Across a wide number of sectors we have found that the manpower required for project implementation is difficult to come by." P, proposed that the - should be a general discussion to exchange sector experience of the pr4olem and of how the Bank should proceed to an assessment of it. 4.20 There were significant shifts in the composition of lending in response to changes in Tanzania's investment program as well as to changes in the economic situation and in Bank strategy. At first, lending to pro- ductive sectors and to rural development in response to Tanzania's strategy was given priority over infrastructure. Later lending was modified to support energy development in response to the oil price crisis and to in- clude program support to address the deterioration in the balance of pay- ments. Finally, lending to support adjustments appeared under the guise of an export rehabilitation credit. 4.21 The terms of lending were also changed as the economic outlook grew less favorable. While initially Tanzania was considered eligible for, some IBRD loans, by mid-1970s it was considered that additional lending would be mainly on IDA terms. The postscript of the 1976 CkP records "growing concern about Tanzania's creditworthiness, its limited ebsorptive capacity...--the high Bank exposure." It was decided that the "use of IBRD resources should be more severely limited" and that IBRD lending would be reduced from a proposed US$240 million to US$173 million for 1978-81. However, in 1980 Tanzania was declared uncreditworthy for further IBRD lending. 28/ [ ] mine. 29/ See Stanley Please, op. cit. 31 After 1981 4.22 Bank assistance in the seventies primarily sipported expansion of productive capacity. In 1980 the Bank signalled a major revision in its strategy toward assistance in support of comprehensive restructuring of the economy. The decisions of the November, 1981 CPP review meeting (the first to be chaired by the new Bank President) gave effect to the new directions. The meeting which focussed primari,y on Tanzania's structural adjustment problems and the absence of agreement with the Bank and the IMF on a pro- gram to improve economic performance decided thatt (1) Until the Government accepts a coherent program consistent with the serious economic problems of the country, further lending would be limited to a small number of projects which could be justified even in the prevailing circumstances. The Government should be further informed that substantial Bank Group assistrace, including non-project assistance, could be expected only if there were agreement on appropriate reforms. (ii) Lending beyond FY82 would be reviewed toward the end of FY82 in the light of the status of the structural adjustment discussions and the reports of the Advisory Group provided by the Bank. (iii) The Bank should inform the Government it would convene a Consulta- tive Group meeting only if there were some prospect for agreement with the Bank and the IMF on an acceptable program of recovery. 4.23 At the same time it was made clear that provided there was satis- factory dialogue the Bank would (i) provide non-project lending of up to 50% of the 1982-86 program to support economic policy adjustments, (ii) support a selection of new projects relevant to the restructuring process, (iii) undertake economic and sector work on medium and long term issues, and (iv) engage in more intensive and sustained aid coordination. 4.24 Bank strategy, which plainly involved the use of lending as lever- age for getting the Tanzanians to decide on adjustment measures, became even more strident in face of a prolonged delay in their reaching agreement with the IMF. In May 1983 the Bank decided not to process any further projects for Tanzania until there was significant progress on an effective adjustment program, ostensibly because in the circumstances it was no 1ong- er possible to isolate projects from the general economic environment.30 It is important to mention that a year earlier, in April 1982, Tanzania's Minister of Finance in a letter to the President of the Bank informed him that the Interim Report of the Advisory Group had just been received and the main thrust of the recommendations had been accented. He went on to say that the Government was formulating a three year Structural Adjustment Prograia (SAP) with four main emphases: (i) the restoration of fiscal and monetary balance; (ii) allocation of resources and the provision of incen- tives for growth of exports; (iii) improvement in financia7 control and 30/ Memo dated May 20, 1983 from SVPOP to EANVP. management of parastatals; (iv) improvement in efficiency of industry, transport and trade. The letter mentioned the intent to negotiate with the IMF and a SAL with the Bank, and sought Bank guidance on the next steps. An internal memo dated July 29, 1982 records the Bank's reaction to Tan- zania's proposed SAP, by stating that the proposal fell short of what was needed, because it was a statement of intentions without details of mea- sures and actions, and contained no specific proposals on the exchange rate and on the adjustment of prices. Another internal memo of November 1982 mentioned that although the SAP was weaker and less specific that the Advi- sory Group's report, it both represented a significant advance on earlier programs and was more likely to be implemented than more radical proposals. It went on to mention that following the September/October mission to re- view the SAP, the dialogue on economic policy had improved. Records of a meeting between the Programs Director and the United States Executive Di- rector in December,1982 mentions the actions toward Structural Adjustment already taken by Tanzania: consolidation of the Development Budget, adjust- ment of agricultural prices, relaxation of restrictions on inter-regional trade, and greater emphasis on maintenance in the budget. The same record also mentions that in October of that year President Nyerere had reiterated Tanzania Government's appreciation of Bank efforts, and their intention to continue to give priority attention to the Bank's suggestions and require- ments. A January 1983 me-o from RVP-EAN to SVPOP mentions that senior Tanzanian officials doubted their ability to plan and implement major eco- nomic reform without external support, once political decisions have been taken, and regarded a large economic and sector work input by the Bank as an important building block in an evolving adjustment program. The point here is that the dialogue revealed Tanzanian efforts to develop au adjust- ment program satisfactory to the Bank but lacked the capacity to design and implement policy reform. The invitation to the IMF to negotiate a fund program in March 1983 was copied to the Bank. These facts suggest that the decision of May 20, 1983 was a surprising hardening of Bank strategy, given the tone of Bank/Tanzania dialogue at the time. 4.25 It has not been possible on the basis of interviews with the prin- cipals involved in the decision to determine the reason for the hardening of the Bank's position at that time. However, one gains the impression, from the record of meetings between the Tanzanian Delegation and the Bank at the time of the Annual Meetings in September 1983, that the Tanzanians believed that the Bank had acted to support the Fund in its disagreement with Tanzania. The President of the Bank found it necessary to reassure, the Delegation by saying that while the Bank maintained close contact with the IMF, it approached problems with a diff,rent perspective and the Bank would continue to make independent judgements about what was needed for economic development in Tanzania. The RVP in a follow-up meeting stressed that "while the Bank did coordinate with the Fund, there was no conspiracy".31 311/ Memo to files - by Chief, EAlDA, September 28, 1983 33 4.26 The draft paper on Bank Strategy and Key Program Goals prepared in November of 1983 put at the top of its list of objectives that of assisting the Government in completing and implementing a structural adjustment pro- gram including mobilization of financing on concessional terms. This was followed by those of pursuing a dialogue to develop a lending program in agriculture, assisting in maintaining infrastructure, and strengthening administrative capacity. Clearly, while th6re was no lending during FY84, the Bank appeared to have recognized that Tanzania was weak in the capacity to plan and implement policy reform. The attachment dealing with the Eco- nomic and Sector Work Program stated that " The design of the FY84-86 work program has basically been guided by the need to assist the Government in formulating a recovery program...The CEM...to be completed in FY84,... will also present a recovery program, together with an estimate of external resources required to support it." Thus although the Bank was exerting maximum leverage by holding the lending program hostage and by refusing to call a Consultative Group meeting before an agreement between Tanzania and the IMF, there was growing appreciation for the fact that the Bank would have to do the basic economic wcrk for a dialogue leading toward a consen- sus or convergence of views on the measures to be included in a program adequate to trigger a SAL and the restart of project lending, and Bank aid coordination activities. This gave effect to the recommendation of the Economic Mission in August 1982, that "We should define a possible SAL program. This should take the form of a minimum set of conditions neces- sary for recovery/halting deterioration in the Tanzanian economy.". 4.27 The Economic Mission to assist the Government in putting together a comprehensive and internally consistent program finally went to Tanzania in September 1985. Meanwhile Tanzania had taken measures regarded by the Bank as significant in the Budget of July 1984, and had followed with more measures in 1985. During this period the Bank and the Fund met several times to resolve their differences regarding the content of a minimum pro- gram for Tanzania. Just before the mission Bank strategy for dialogue was changed, shifting away from a discussion of minimum conditions to a discus- sion of alternative scenarios for levels of Bank and other donor assistance depending on the pace of adjustment effort. The Government indicated that it was prepared to put together a program along the lines of the high sce- nario, and requested Ban %ssistance in its preparation. This was sub- stantially completed in March 1986 when the Government formally applied for the Structural Adjustment Credit. The Gover-ment took further measures in the 1986/87 Budget. The telexed comment of the Resident Representative of the Bauk probably accurately reflects Bank Strategy at the time "Only through a judicious mixture of support and pressure will we contribute to make the process irreversible and to preserve its dynamics". Analysis of Bank Strategy 4.28 Having reviewed the evolution of Bank Strategy one must ask why it evolved the way it did. Why did the Bank at various times wish to provide to Tanzania a particular mix of lending and advice and a certain level of lending?. The answer lies partly in the considerations influencing the supply of lending and advice, and partly in the strategy determination - 34 - process. Important among the former would be (i) the Bank's view of its role in development generally; (ii) the degree of convergence between the Bank and Tanzania regarding approach to development; (iii) the availability of resources for Bank lending to Tanzania; and (iv) the Bank's perception of the degree of complementarity or substitutability between the Bank's and other sources of financing and advice to Tanzania. 4.29 The Bank's view of its role in development underwent important change during the period under review. Initially, the Bank saw itself as a lender for development projects, mainly infrastructure, and as a passive advisor on development strategy. Toward the mid-seventies it became in- creasingly concerned with the need to address the problem of absolute pov- erty and the policy environment affecting the productivity of investment in projects. The oil price crises led to a Bank role in stabilization with emphasis on quick disbursement essentially to provide balance of payments support. The experience of the late seventies led the Bank to realize that longer term policy adjustments were required in most developing countries, and led in turn to the introduction of SAL in 1980. These changes influ- enced both the content of advice and the nature of lending. 4.30 Between 1961 and about 1976 there was much convergence between the Bank and Tanzania on the appropriate strategy for Tanzania. At first the Bank's ideas were accepted by Tanzania and reflected in its Plans. Later when Tanzania spearheaded the thinking on the direct approach to poverty alleviation in development strategy, their approach was enthusiastically welcomed by the Bank and had a profound influence on the Bank's Plan for 1974-78. After 1976 and especially in 1979180 there was a widening diver- gence between the Bank and Tanzania on appropriate strategy. At first the Bank was concerned about Tanzania's targets for social services and on the inadequacy of export orientation of agricultural policies. Later there was disagreement over the genesis and solution to the economic crisis, with the Bank attributing a large part to bad economic policies and seeing fundamen- tal structural adjustment as the solution, and with Tanzania attributing the crisis mostly to external shocks and seeing the solution in a large injection of external resources. Since 1982 Bank strategy has been to foster a slowly increasing convergence in views based on the acceptance, at least in part, of the findings of the TAG, and on new economic and sector work. 4.31 The availability of resources for lending to Tanzania has also varied over time depending on overall availability to the Bank, specifical- ly the replenishment of IDA, the targets for lending to Africa, and the demands by, and eligibility of, other country members of the Region. With lending being essentially project focussed, the availability of a project pipeline was also a factor influencing lending to any borrower, and which explains the low level of lending to Tanzania in the early sixties. After 1968, and indeed until 1977, the increasing lending targets for Africa, and the unstable political situation making for low eligibility in a number of countries meant that there was 'pressure to lend" to Tanzania. Tanzanian eligibility for IBRD financing up until 1980 was also a factor favorable to a high level of availability of financing. About 1981/82 availability of - 35 - IDA resources were again in doubt adversel7 affecting total supply to Africa and in turn to Tanzania. Also around 1980 conditions settled down in Uganda, and Sudan, which once again became eligible for support of their reconstruction and rehabilitation programs; and Kenya and Malawi reached agreement with the Bank on SAL programs. In 1985 the situation was some- what relieved by the establishment of the Special Facility for Sub-Saharan Africa. 4.32 The availability of alternative sources of supply of financing and advice ordinarily would be expected to affect Tanzania's demand for Bank services, the direction depending on whether Tanzania perceived these as complements or substitutes for Bank services. However the 1978 Strategy Paper suggests that the Bank, mindful of the need for leverage, also took account of the availability of resources from other sources in deciding on how much to lend. It was felt it had to increase its lending to enhance leverage since other donors were increasing their support. In 1981, when the outlook for increased support by other donors became unfavorcble, the Bank reduced its lending and made .ts aid coordination activities condi- tional on favorable prospects for an agreement between Tanzania and the Bank and IMF on acceptable adjustment measures. 4.33 Changes in the above-mentioned factors were directly related to changes in Bank strategy for Tanzania. First, the change in the Bank's perception of its role led it to seek to increase advice per unit of lend- ing Bank-wide. Second, the misgivings regarding Tanzania's strategy and economic mananement in the latter part of the seventies led the Bank to urge Tanzania to undertake profound policy reform. Both of these influ- ences operated to increase advice relative to lending, which was reflected in such operations as the Export Rehabilitation Credit of FY81 with its extended list of conditions to be met both prior to Board presentation and prior to a follow-on operation. Recent tendencies toward convergence of views would be reflected in greater Bank willingness to agree that policy conditionality can be met during the period of disbursement of loans. Third, the changes in those factors affecting the availability of Bank resources to Tanzania have been such that the preferred position of the Bank is one associated with a lower level of lending in the eighties than that of the seventies. 4.34 The appropriateness of the strategy in terms of the levels of lending and advice must be judged in relation to the country's ability to absorb lending and its willingness and ability to undertake policy reforms. The indications are that in the sixties the Bank's preferred lending/advice combinations were within the levels that could be absorbed and willingly undertaken. Available evidence from Bank memoranda, and project supervi- sion reports suggests that the level of lending was beyond what the country could effectively absorb, while the country seemed willing to accept more advice than was provided. During 1978-81, the level of lending was more than could be efficiently absorbed, and the level of advice the Bank wanted to have Tanzania accept was clearly beyond what it was willing to accept and/or able to implement. Since 1982 Bank lending has been well within the - 36 - client's capacity to absorb it. Initially. Tanzania was reluctant to ac- cept the Bank's recommendation on reforms, but has gradually been showing increasing willingness to do so. Recently, the Bank has become more aware of the need to help to relax a constraint on the capacity to undertake policy reform restricting the absorption of advice. (The technically mind- ed may wish to turn to Annex A : A Framework for Analysis of Bank/Country Relations - to visualize advicellending combinations in relation to the absorptive capacity frontier and the national sovereignty frontier.) 4.35 Consistent with the Bank not having to compromise its own view of its role and its objectives in other countries, the Bank should aim at having a level of lending and a level of advice as close as possible to those which are optimal for the client. The identification of these levels requires that the Bank develop and maintain reliable indicators of absorp- tive capacity and bases on which to make the essentially political judge- ment of what level of advice wuuld be 4ust willing to accept and can imple- ment. Even assuming that the levels of these constraints may be estab- lished with some confidence, the Bank should not simply adopt the mix of lending and advice defined by them; first because the Bank should be in- terested in helping the country maximize its benefits from the relationship not at a point in time but over time; and second, because the Bank having established its lending/advice on the basis of careful assessment would not abandon it just to facilitate attainment of the point in time maximum for the country. Clearly, as the country accepts advice and adjusts its views on what degree of advice it is willing to take, and as absorptive capacity constraints are relaxed, the Bank is likely to be better able to accommo- date its client without compromising its wider objectives. Bank strategy should therefore include "education" to make its advice more acceptable and technical assistance to help relax absorptive capacity constraints. The Process of Strategy Determination 4.36 The process of strategy determination has been evolving over time and has affected the relative emphasis on lending and advice. The process was formalized just after 1968, when the President of the Bank in outlining the goals of its Five Year Program inc*aded that of Oformulating a 'devel- opment plan' for each country, to see what the Bank Group could invest if there were no shortage of funds, and if the only limit on our activities were the capacity of our member countries to use our assistance effectively and to repay our loans on the terms on which they were lent.' The Country Program Paper, the main document of the process, was for the first five years in the case of Tanzania a lending plan essentially reflecting the projec. pipeline of the various projects divisions. Although the document contained a review of country objectives and performance, the content of Bank/Tanzania economic dialogue received little attention. Since Programs divisions and Projects divisions were united in their paramount concern for meeting lending targets the analysis of the economy was mainly directed at establishing the size of the gap to be closed by Bank and other donor sup- port and at confirming creditworthiness. Disturbing issues regarding poli- cies were not highlighted. Even questions regarding absorptive capacity I - 37 - and implementation bottlenecks were not allowed to interfere with an opti- mistic lending posture. They could always be handled, or so it was made to seem, by an injection of technical assistance (mainly consultants) and, by more Bank assistance in project identification and preparation. 4.37 The economic crisis of 1974 changed the nature of the Tanzania CPP. Afterwards, considerably more emphasis was given to the analysis of economic performance and outlook and the requirements for renewed growth. The statement of Bank strategy became more than a statement of lending intentions, although the influence of lending targets continued to be re- flected in concern over slow disbursement and in the failure of the Bank to slow down its lending even when it was telling the Government to restrain and consolidate an overblown development budget. Much more attention was given to the needed policy adjustments, the studies to be undertaken, and to the condition of the dialogue. It is during this period that the Strat- egy Papers prepared by Programs as an input in the CPP process appeared. The justification for the Tanzania Strategy Paper was spelled out in the March 1979 paper. It stated that firstly, it was important to reach con- sensus between Programs/Projects on the major issues in each sector; sec- ondly, more attention needed to be focussed on the interaction between project performance and sector strategy/policy issues and the priority of individual sector issues. It continued by expressing concern at the widely different approaches among and within sectors and that this lack of consis- tency had been noted by and sometimes confused the Government. The concern with the policy reform requirements for recovery and growth were not only expressed by Programs economists, those in Projects were increasingly real- izing that many project failures were due to defective sector and macro policies and lent support to what became a movement for structural adjust- ment. 4.38 The CPP disappeared in 1982 and the Country Strategy Papers mainly reflecting the focus on structural adjustment became the document of Bank strategy. With the scarcity of resources to lend, and the resultant de- cline in pressure to do so, the policy dialogue and associated economic work dominated strategy. Meanwhile, the process of strategy formulation seemed to have become increasingly ad hoc. The decision to suspend lending in May 1983 seems to have been made without any formal discussion of coun- try strategy. As agreement with Tanzania drew nearer the impending SAL provided the main opportunity for discussion of strategy. 4.39 The process now revolves around the preparation of a Policy Frame- work Paper which represents the concerted views of Tanzania, the Fund and the Bank. Unlike with the CPP, this process involves prior discussion with the country of the main thrust of policy reform and agreement on the mea- sures to be taken. It is therefore consistent with the move back toward promoting convergence rather than dependence on leverage as a way of influ- encing stabilization/adjustment/development policy. . 38 - V. BANK/TANZANIA RELATIONS - EVOLUTION AND ANALYSIS 5.01 The beginning of the Bank/Tanzania relationship pre-dates Indepen- dence. In 1959 the Bank, at the request of the Governments of Tanganyika and of the United Kingdom (which administered the territory under U.N. trusteeship), sent a mission to assess the development prospects and to give policy advice. 5.02 The 1959 Bank Mission advocated, among other measures, "agricul- tural transformation" through the formation of model villages. The recom- mendation was incorporated in the First Five Year Plan: smallholder agri- culture was to be modernized by grouping dispersed farmsteads into ra- tionally laid out settlements with appropriate economic and social infra- structure. The ultimate goal was to establish 200 villages.32 Some 30 schemes were actually started but the program proved too costly and was officially abandoned in April. 1966, with a financial loss reportedly of some 20 million shillings.33 The failure is said to have undermined the Government's trust in the Bank's wisdom.34 5.03 Relations were also adversely affected by the Bank's reluctance to finance the Tazara railroad. The major reason for this undertaking was politicals to give Zambia a transport route to the sea that would avoid the (then) Rhodesian territory. The Bank staff favored a road transport alternative, calling for the upgrading of existing roads. Negotiations for a loan to finance the rail line dragged on. In the event the financing came to be provided by China, but a residue of suspicion remained that the Bank (possibly for political reasons) was not willing to accommodate proj- ects considered by Tanzania to be of key importance. 5.04 Elements of discord notwithstanding, the Government had frequent recourse to the Bank's advisory services. In the initial post-independence 32/ See Coulson, op. cit. pp. 146-147 ff. 33/ Cheryl Payer, "Tanzania and the World Bank", DERAP Working Paper A 285, Bergen, December 1981, p. 2. 34/ The financial loss amounted to some 20 million shillings. See Cheryl Payer, "Tanzania and the World Bank", DERAP Working Paper A 285, the Ch. Michelsen Institute, Fantoft, Norway, December 1982, p. 2. - 39 - . period Tanzania suffered from an acute shortage of technicians and of ad- ministratorst most of the expatriates left, while there was, as yet, scar- city of trained and experienced Tanzanian personnel to replace them.35 For example, to help prepare a national development program the Minister of Finance requested in March 1962 that the World Bank provide an advisor on public investment planning. In July, 1963 the Tanganyika Director of Plan- ning requested that the Bank provide forecasts of world demand for Tanganyika chief export crops (a similar request was addressed to the FAO). In February 1965 the Ministry of Finance asked the World Bank to review the first Five Year Plan. The Era of Good Feeling 5.05 A rapprochement occurred between the Bank and the Government in the 1970s, reflecting the reorientation of the Bank's policies. Whereas in the 1960s project selectinn was dictated primarily by economic profitabil- ity and by financial feasibility, in the 1970s great weight came to be attached to effects of projects on income distribution. 5.06 The change in direction was announced by the Bank's president, Robert McNamara, in his speech to the Board of Governors delivered in Nairobi in September, 1973. According to Mr. McNamara the "decade of rapid growth [i.e. the decade of the 1960s] has been accompanied by greater mal- distribution of income in many developing countries, and that the problem is most severe in the countryside." "The growth is not equitably reaching the poor, and the poor are not significantly contributing to growth." Henceforth, the Bank was to favor projects that contribute to the improve- ment of the standard of living of the poorest masses, with special atten- tion to subsistence agriculture. But helping poor farmers requires insti- tutional changes: OSuch institutions and organizations can take any number of forms: smallholder associations, country or district level coopera- tives, various types of communes." To further agricultural development the Bank expected to lend $4.4 billion during 1974-78, as compared with $3.1 billion in 1969-73. Moreover, 70% of the new loans were to have a compo- nent for the smallholder. 5.07 Mr. McNamara's speech was enthusiastically hailed by President Nyerere, who, in contrast to the past, assumed a very positive attitude to the Bank.36 Personal elements also undoubtedly played a role in the rapprochement: Mr. McNamara and President Nyerere established a relation characterized by mutual trust and understanding. 35/ See David M. B. Castle, "Memorandum on the Investment Climate in Tanganyika", March 1962. 36/ See the memorandum from Bernard S. Bell to Robert S. McNamara, "Meeting with President Julius Nyerere, dated 10/17/73. - 40 - 5.08 During the "Era of Good Feeling" the Bank's support of the Govern- ment verged on a blanket endorsement of Tanznnia's brand of socialism. It has been alleged that the Bank's attitude was, in part, motivated by the World Bank's need to secure a client "on the left...after it [i.e. the Bank] was subjected to heavy criticism for its failure to support the Allende government in Chile"... "In this perspective Tanzania must have seemed like a much less dangerous client which would provide the Bank with some badly needed ideological legitimacy on the left with which it could counter criticisms of its generally conservative policies."37 5.09 Whatever the truth of this allegation, there is evidence that the Bank wished not to appear as a critic of "left-wing" policies. For in- stance, in 1975, Mr. McNamara, appealed to President Nyerere to help quell press rumors that the Bank insisted on Tanzania abandoning its development philosophy as a condition of lending. In answer, President Nyerere obliged by making it clear on a public occasion that the World Bank and the IDA were among the most important contributors aleng the lines chosen by Tanzania.38 To cite another example: in a speech at a conference on the "New Economic Order" held in Dublin in June, 1976, the Tanzanian ambassador to London attacked the World Bank as a tool of neo-colonialism, intent on hurting Tanzania. A World Bank participant sent a telex to Washington asking for help in refuting the charges. In this telex he stated that his own impression was that the World Bank had a close relation which Tanzania, "in the pursuit of its radical objectives." In answer, he was assured that there were "no fundamental differences on development objectives nor on any important policy issue."39 5.10 The Bank's sensitivity to accusations of political bias is easily understood. As an international organization the Bank must refrain from favoring one economic system over another. Its situation is especially delicate in that its financial resources come primarily from free enter- prise developed countries, whereas some of its lending is to developing countries with mixed or with Socialist systems. The problem is compounded by the equation drawn between capitalism and neo-colonialism by "dependen- cia" theorists. Advocates of this doctrine, popular in the 1970s in "pro- gressive" circles, claimed that free enterprise and free trade favored the "North" at the expense of the "South', and that it was in the interest of the latter to adopt plans designed to serve their 'national interest" while largely ignoring market signals. 5.11 Approval of Tanzania's socio-political philosophy gave the Bank ready access to the Government, and facilitated free discussion: "There is no matter that we [i.e. the Bank] consider important for the furthering of 37/ Cheryl Payer, loc. cit., p. 5. 38/ See Letter of Robert V. McNamara to President Julius Nyerere, dated 2/21/75, and President Nyerere's answer, dated 4/2/75. 39/ Telex from World Bank European Office to Division Chief for Tanzania, dated 6/15/76, and Telex dated 6/16/76 in reply. I 41 the Government's development strategy that we cannot take up at the hikhest level for discussion and for subsequent action..40 But the closeness also had serious drawbackst several of the officials interviewed by us in 1987 voiced the opinion that, in the 1970s, the Bank abandoned the position of an "honest broker" and of impartial expert. By becoming a quasi-partner of the Government, the Bank had to temper its opposition against unsound proj- ects and policies. Instead, the Bank supported (and possibly even initi- ated) projects which could more readily be justified on political rather than on economic grounds. Many of such projects failed. At this juncture it is impossible, unnecessary and, indeed immaterial to try to apportion the blame for the mistakes committed in the 1970s. It is important to note, however, that while the responsibility was shared, the entire burden of the mistakes is borne by Tanzania. A Period of Distancing 5.12 The Bank's initial response to the crisis of the 1970s was to increase lending, and to give full backing to the Government's program. However the Bank reacted to the Government's apparent inability or unwill- ingness to take adequate remedial action by demanding reforms dictated by "orthodox" economic analysis. In effect, therefore, the Bank distanced itself from the Government and drew close to the position taken by the IMF, a change in stance that, for a time, resulted in virtual estrangement be- tween the Government and the Bank.41 5.13 The increasingly critical attitude of the Bank did not, at first, destroy the mutual understanding. Though the Government objected to com- ments that, in its opinion, touched on political issues, it was willing to engage in a purely technical discussion. A ride-ranging appraisal of the economy presented by the Bank in its 1977 Basic Economic Report (BER) re- ceived in Tanzania serious consideration. In the words of Lyle Hansen, the Bank's Resident Representative in Dar es Salaam, "it reflected well on the quality of our (the Bank's] relationship with the Government that the BER could make blunt criticism on such a variety of subjects.'42 It must be noted that the frankness of the discussion owed much to the skills and to 40/ 1975 CPP, p. 2. 41/ The linkage between the Bank's policy analysis and its lending policies are discussed in Section V. 42/ RVP Review meeting on the 1977 CPP held on December 1977 as reported by a Note to Files. At the same meeting, however, there wps a comment that the draft BER has "entered the political area"; t.at offensive passages were deleted by the Region. - 42 the personality of the Resident Representative,43 and his death in 1979 contributed to the deterioration of the relations. 5.14 The lengthy and convoluted negotiations which took place between 1978 and 1981 over a program loan reflect the deterioration of the Bank- Government relations.44 A program credit was first discussed and applied for in April-May 1978; the application was withdrawn, but in the face of the foreign exchange crisis, negotiations for a five-year structural adjustment loan were opened in August, 1978. Despite the urgency of the situation, the loan did not become effective until May 1981, and it took the form of an IDA export rehabilitation credit (ERW for SDR 40.9 million (US$50 milLon) to be disbursed over two years. 5.15 The most important factor that delayed the conclusion of the loan agreement was the Bank's insistence on, and the Government's resistance to, policy reforms. Tanzania was convinced that the causes of the crisis were external and short term, - war with Uganda, fall in coffee prices; which could be addressed by an injection of financial assistance. While conced- ing that external factors had contributed to the crisis, the Bank thought that domestic policies, e.g. low producer prices and inefficient parasta- tals, were the main causes of the stagnation in exports. With the passage of time the Bank insisted on increasingly stringent measures. Change in the conditionality reflect, perhaps, the diagnosis that continuing deteri- oration of the country's position called for ever stronger remedies. It also appears, however, that within the Bank itself the balance of opinion shifted in favor of a more conservative course, with new demands being made up to the last stage of negotiations.45 43/ As Williams College professor, Mr. Hansen impressed his post-graduate students (among them several Tanzanians who, subsequently,obtained high civil service posts) with his wisdom and objectivity. In Tanzania, he became valued and trusted for the same qualities. See, for instance, the remarks of Mr. Msuya at the September 15, 1983 Regional Management Meeting with the Tanzanian delegation as reported in Memorandum to Files, dated September 28, 1983. 44/ Memo dated June 20, 1986 by Chief EAlSE, Tanzania: Export. Rehabilitation Program - Draft PCR." 451/ Last minute additions to conditionality included the requirement that the Government prepare an Agricultural Service Action Program incorporating plans for research, extension, input delivery and crop collection in rural areas. There were other changes as well. After a provisional accord was reached that the Governament should put 152 of export earnings from six major crops into a special account to be used to pay for imported inputs into agriculture, the Bank insisted that, instead, the Government should agree to a $50 million contribution. See Chief EAlSE, loc. cit. supra, pp. 8 and 21. - 43 - 5.16 At the beginning of the program loan discussion the Government of Tansania was engaged in negotiations with the IMF that turned out to be protracted and frustrating for both sides. The Government's view of the IMF position was sharply summarized in President Nyererele January 1, 1980 dinner speech to the diplomatic community. The President, in his remarks labelled "strange and repugnant" what he perceived to be IMF's attempt to exploit Tanzania's balance of payments difficulties in order to interfere with the management of the economy. The Government, he said, was ready to accept IMF conditions imposed to insure that the money provided by its facilities is not misused, but it expected those conditions to be non-ideo- logical. But the Government wae not ready to devalue, just because this is a traditional free market solution. It was not prepared to surrender the quantitative restrictions that insure the importation of essential commodi- ties, rather than luxuries, or to control inflation through monetary means only, regardless of the effect of such action on the poor. If compliance with the IMF means surrender of Socialist principles, the Government would dispense with IMF help.6 5.17 As late as April 1979, Mr. McNamara was able to assure the Govern- ment that though the Bank's program lending to support the balance of pay- ments is contingent upon the design of a sound development plan and ade- quate imports to support development, there is no pre-cond'&tion that an agreement with the IMP be concluded. However, in the absence of IMP's Extended Fund Facility (EPF) any program lending from the Bank would be inadequate.47 Gradually, however, the Bank put an increasing emphasis on the need for IMP support. In December, 1981, Mr. Clausen, the new World Bank President stated unambiguously in a meeting with President Nyerere that an agreement with the IMF for the provision of short-term finance was the pr3condition for any longer term structural adjustment program that could be given Bank support.48 Thus the Bank, indLrectly, came to subscribe to IM pre-conditions which the Government found 'strange and repugnant." and from being a partner, turned into a member of the *enemy camp." 5.18 The stiffening of the Bank's position was a caus of harlship for Tanzania. The virtual cessation of projects aid at a time of extreme for- eign exchange crisis was perceived by Tanaania to be designed to ruin the economy.49 To this day, the sudden policy shift is a matter of controversy. While some of our informants interviewed in 1987 believe that the reforms .41 Telex dated January 2. 1980 from Bank's Resident Mission, Dar es Salaam to the World Bank. 471 Memorandum to Files, dated April 9, 1979. - Notes on an April 6, 1979 meeting between Mr. McNamara and Tanzanian Minister of Finance Xtei, as recorded by Acting Director, BAl, g1 Memorandum to Files, 12117/81. - Notes on a December 1981 meeting of Mr. Clausen with President Nyerere, as recorded by Chief EAlDA, Al See the record of the Clausen-0yerere meeting, loc. cit. supra. could have been intro4uced at a lesser cost to the country through persua- sion, others hold that a "shock treatment" was essential to induce the Government to change its course. 5.19 The common front presented by the Bank and the Fund proved. in the longer run, not to be detrimental to Bank-Government relations. Though the Government voiced its discontent with the lack of the two institutions' sansitivity to socio-political factors inhibiting return to economic ortho- doxy, there was increasing receptiveness to Fund and Bank advice. the shift reflects, no doubt, the "ideologues'" inability to solve the crisis, and the consequent increase of the influence of Tanzanian "technocrats". but also the fact that the Bank was capable of giving concrete, practical advice, and of mobilizing the resources required to implement the reforms and to improve the country's economic situation. Mutual Confidence Renewed. 1981 - Present 5.20 The first step toward the re-establishment of closer relations came in March 1981 when Mr. McNamara asked President Nyerere to consider the appointment of an Independent Advisory Group to help the Government draw up a comprehensive action program. The Bank declared its willingness to finance such a group, and, if desired, to assist in its organization. The group was to be composed of "internationally-recognized experts, knowl- edgeable of Tanzania's problems and sympathetic to Tanzania's development objectives." "Once an economic program is completed, the Bank would be prepared to work with the Government to mobilize financial support for it.50 5.21 The Government, after due deliberation, agreed to the formation of an Advisory Group. In his letter of acceptance President Nyerere stressed the fact that Mr. McNamara did not make the acceptance of the group a con- dition for World Bank assistance. He added, furthermore, that had it been made into such a condition, the suggestion would certainly have had to be rejected.51 This remark reflects the Government's willingness to listen to advice and its sensitivity to any impingement on sovereignty. 5.22 The Bank and the Government agreed that the Advisory Group should be headed by Mr. E. Michanek, former head of SIDA and also include Profes- sors Cranford Pratt and Gerald Helleiner, both of the University of Toronto. The Group began its work in September, 1981 and completed it on schedule in April, 1982. The technical findings and policy recommendations bore close similarity to the position taken by the Bank. By accepting the main proposals the Government thus drew closer to the positions taken by the Bank and by the Fund and it became more receptive to the Bank's advice.52 50/ Letter from Robert McNamara to Julius Nyerere, signed March 10, 1981.' 51/ Letter from President Nyerere to Robert McNamara, dated May 12, 1981. 52/ Memorandum of July 29, 1983 from Director EA1 to SVP Operations, "Tanzania-Recent Developments and Next Steps'. 5.23 The restoration of close cooperation was a gradual process: as late as September, 1985 a high Government official expressed the view that the Bank which, in the 1960s, so decisively sustained the development pro- cess, may now be instrumental in undoing it.53 The rapprochement was. doubtless helped by the stance of the World Bank staff, and in particular that of its Resident Representative. Though the Bank insisted on Government-IMF agreement, it also played the role of an informal intermediary, and attempted to inform the IMF staff on the political and social constraints faced by the Government.54 5.24 As the relations improved, the Bank's technical advice once again came to play a major role. In 1983 the Bank "through (its]...CESW...played a vital role in sensitiziag the Government to the need for domestic policy reform... The Agricultural Sector Report was absorbed by the Government by substantially drawing upon it to prepare its own "Report of the Presiden- tial Commission of Agriculture" which subsequently formed the basis of the Government's White Paper on Agriculture. "Many of the suggestions made in the CEM, such as removal of subsidies on fertilizers, as well as the analy- sis of the terms of trade have been included in the FY85 budget documents.055 In the 1985, at the request of the Government, the Bank organized a mission to assist the Government in the preparation of a medium term Economic Recovery Program and established a timetable for a meeting of the Consulta- tive Group.56 5.25 The Bank, in cooperation with the Government and the IMF, played a key role in the design of the Economic Recovery Program, adopted by the Government in 1986. The Bank was also instrumental in bringing together the parties, whose cooperation was essential for the success of the re- forms. The debt rescheduling agreement reached at the Consultative Group Meeting, convened by the World Bank and held in Paris on June 10-11, 1986 enabled the IMF to extend to Tanzania the needed credit facilities, without which renewed Bank lending would not have been possible. The Bank's back- ing, in turn, was taken as a positive signal by bilateral donors and lend- ers to renew their aid. 53/ Letter from Amir Jamal, Minister of State, Cabinet Affairs, President's Office to A. T. Clausen, dated September 25, 1985. 54/ See letter No. 12 dated May 17, 1984 from the Resident Representative in Dar es Salaam to Division Chief, EAlDA. See also OM dated March 1, 1985 from RVP, ESA to Director, African Department, IMF. 55/ Tanzania: Indicative Statement of Economic and Sector Work, FY85-87. 56/ Memorandum dated September 3, 1985 from Economist EAlSE to Acting Chief, EAlSE "Tanzania-Economic Mission Issues Paper. See also memorandum from mission members to Chief EAlSE, "Tanzania: Economic Mission - Back to Office Report, January 8, 1986. I The Current Status of Relations 5.26 In the interviews conducted in November 1987, the Tanzanian offi- cials generally took a positive view of the current Bank-Government rela- tions. Appreciation was voiced for the Bank's attitude of constructive criticism. Repeatedly it was made clear to the Bank that the Tanzanians want their point of view to be given respectful consideration, but that they expect the Bank to exercise its independent judgement. 5.27 Objections were occasionally voiced concerning the manner of pre- sentation of Bank advice: some of the Bank technicians, sounded as if they were certain that they presented the only correct solutions. *Tanzanians admit readily that they made some mistakes--and so should the Bank* one respondent said, while another voiced a similar opinion: "we would welcome a little more humility." 5.28 Major stress was put on personal relations. The Resident Repre- sentative was seen as playing a key role, combining the functions of Ambas- sador, of Technical Advisor and of intermediary between the Government and the Bank headquarters. He should be sympathetic to Tanzania and have an understanding of its economic, political and social problems, but above all, he should be highly technically competent and have an independent judgment. Some frustration was expressed at the fact that the Resident Representative's office has little autonomy and a limited staff and the current situation was unfavorably contrasted with the situation that ex- isted when the Nairobi office functioned as a regional center, but there was little unanimity as to the advisability of increasing the Resident Representative's staff. 5.29 The strongest criticism was directed toward the Bank missions. We were repeatedly told that there were too many missions, taking up too much scarce time of the officials. The missions often seemed to be ill-pre- pared; many of them asked the same superficial questions, and they did not stay long e-. ih to investigate issues in depth. Many missions left with- out discust -, heir findings with the local officials, while the mission's reports were, in many cases, put in the form of internal Bank documents, so that no direct beneftt accrued from their visits. The same objections were raised as long ago as 1971.57 Some things never change. 57/ Memo to files dated March 31, 1971: "Mr. Chenery's Talks in Tanzania, Points of Interest; Mr. A. H. Jamal, the Minister of Finance, said that he would prefer to see in-depth economic missions, coming perhaps less frequently than in the past and timed to fit moza smoothly into the Government's planning process. Analysis of Bank/Tanzania Relations 5.30 The purpose of analysis is to try to identify and understand the underlying factors responsible for the tone of relations described in the foregoing section. The analysis is based on the recognition that the Bank/ Country relationship has at its core a transaction in a complex product- -financing and advisory services. The underlying factors responsible for the course of relations are mostly those determining this transaction--the country's demand for Bank lending and advice and the Bank's willingness to supply financing and advice. (The te..hnically minded may turn to Appendix A - A Framework for Analysis of Bank/Country Relations). 5.31 The main factors which influenced Tanzania's demand for Bank lend- ing and advice have been the following: (a) the development strategy - capital intensity and pace; (b) economic crises - esp. due to oil prices and prices of exports; (c) availability of other financing and advice from other sources; (d) perceived cost of Bank lending and advice; (e) perception of absorptive capacity. 5.32 The factors which influenced Bank willingness to lend to and advise Tanzania have been the following: (a) availability of resources to "end to Tanzania; (b) Bank evaluation of Tanzania's strategy and policies; (c) Bank view of economic crises; (d) Bank perception of its role in development; (e) Bank perception of absorptive capacity; (f) Bank perception of Tanzania's capacity to reform policies. 5.33 The degree of convergence or divergence in Bank/Tanzania views on development strategy and on the genesis and response to economic crises have largely determined the tone of relations. Up to the mid-seventies there was apparent convergence on development strategy. There was agree- ment on the causes of and appropriate policy responses to the economic crisis at the time of the first oil price increase in 1974. In the phase of divergence after the mid-seventies the Bank was dissatisfied with Tan- zania's development policies, the inconsistencies of which had become obvi- ous having been exacerbated by shifts in industrial strategy and in pace of change. After 1978 there was a7o fundamental disagreement regarding the causes and cures for the new crisis conditions in the economy. Since 1984 views on these matters have gradually converged again. In retrospect it is clear that convergence of v-ews was generally associated with higher lend- ing. 5.34 Bank/Tanzania relations have also been affected by the availabil- ity of resources for lending to Tanzania, both by the Bank and by other sources. Bank resources for lending to Tanzania increased during the late sixties until the late seventies, declining until the early eighties and increasing again since 1985. Resources from other donors grew slowly at first, accelerating during the latte: half of the seventies and declining absolutely during the first half of the eighties. Initially lending by other sources very likely increased the demand for Bank resources when they were directed at different and complementary sectors, and tended to reduce the demand for Bank resources when they were competing for placement in the same sector. With the decline in lending from other sources and the in- creasing tendency to follow the lead of the Bank during the eighties this competitiveness has subsided. 5.35 Convergence of views and availability of resources have tended to work together in influencing Bank/Tanzania relations; the phase of conver- gence essentially coinciding with the period of increasing availability of Bank resources for lending to Tanzania. The outcome was the sharp increase in and high level of Bank lending right up to the middle of the seventies. This lending was facilitated by apparent agreement in the belief that ab- sorptive capacity would not prove an intractable problem. The Bank overes- timated the ease with which absorptive cv--city could be increased through technical assistance; while Tanzania's &toroach of "we will run while others walk" betray-d similar optimism. 5.36 The phase of divergence of views overlapped with a reduction in the availability of Bank resources during the early eighties, resulting in a sharp fall in lending. Since 1984185 with views converging and resources for lending becoming more abundant, lending has been once again on the increase. 5.37 Early in the phase of divergence during the latter part of the seventies Bank lending continued to increase in contradiction to the gener- al tendency observed above. The phase of divergence after 1977 coincided with a period of sharp increase in assistance from other donors (more than doubling in current dollars between 1977 and 1980). The Bank felt that in order to maintain its leverage in policy matters lending had to be in- creased to prevent its share in total inflows from falling. Apparently it was assumed that lending by other donors was no longer complementary to that of the Bank; a not unreasonable assumption since both were involved in the productive sectors especially industry and Bank involvement in infra- structure had subsided. Another explanation is that the build-up in the Bank's project pipeline had occurred before the change in attitude to Tan- zania's policies, and the recognition within the Bank that given the other problems the client was facing its attention was diverted from domestic policies. Shutting down the lending program in those circumstances would have appeared unusually harsh. 5.38 In the sixties one could have assumed that the flow of Bank advice to Tanzania would have been in some relatively fixed proportion to the flow of lending, and the factors influencing the latter would have sufficed to explain the former. This was no longer true beyond the sixties, for Bank lending has changed from project-based to include a growing component of policy based loans, which are invariably associated with a larger amount of advice per dollar of lending. - 49 - 5.39 Changes on the demand side and on the supply side have been re- sponsible for the change in mix between lending and advice in the core transaction between the Bank and Tanzania. The basic factor underlying these changes has been the occurrence of destabilizing price changes in international commodity markets, principally, but not exclusively, that for petroleum. These have caused drastic changes in the international economy, and have complicated the management of developing economies by adding unfa- miliar stabilization problems to the usual ones of resource mobilization and allocation. 5.40 Tanzania renponded to the first oil crisis by requesting Bank advice and study of its fiscal and balance of payment problems, and has since then been willing to seek advice on stabilization matters. Indeed if the history of Tanzania's requests for Bank advice is traced it will be seen that the tendency has been to seek advice more so on matters of eco- nomic management that on national development strategy. As problems of national economic management have become more pressing Tanzania has become more open to advice. The resistance to Bank advice at the end of the sev- enties was therefore the logical outcome of the Bank's suggestion that the crisis was primarily not a stabilization problem but one of development strategy and policies. 5.41 The Bank responded to the destabilizing changes in international markets by rethinking its role in support of developing countries. In Tanzania this rethinking initially was reflected in the Program Loan of 1975 and Credit of 1977 which were essentially balance of payment support operations. The important innovation by the Bank was the introduction of lending to support countries in their effort to restructure their economies through adjustment in their development policies and institutions. This type of lending carried with it a larger component of advice than the usual project-based lending. However, it was based on the recognition that the problem being addressed was partly a stabilization one and partly one of development over the longer term. Linkage with the Fund was regarded as essential since the Fund was better equipped to advise on stabilization aspects. Since the Fund was regarded by Tanzania as most unsympathetic and as intruding on national sovereignty, linkage of Bank SAL to a Fund program did not help to make Bank advice in the context of adjustment lending read- ily acceptable. The Bank's reaction was to propose the TAG to provide ad- vice which it hoped would have coincided with its own viewpoint. 5.42 With the decline in its own resources for lending to Tanzania and the decline in support by other donors the Bank sought to increase its leverage over the clients decisions by drastically reducing lending, even- tually to zero. The assumption seems to have been that Tanzania had the capacity to undertake policy reform but was unwilling. This was only par- tially true. Tanzania indicated its willingness by trying to prepare its own structural adjustment program and by starting to take measures. Gradu- ally the Bank accepted that Tanzania was lacking in the capacity to under- take reform, ie. identify and implement appropriate adjustment measures. The nature and tone of advice was changed in response to this realization. Tanzania asked for Bank assistance in preparing a more adequate program. The phase of maturity in relations had arrived. - 50 - VI. BANK'S ECONOMIC AND SECTOR ZQRK Introduction 6.01 The Bank has been committed to assist Tanzania to develop along the path the country has chosen, as well as to modify its development poli- cies in response to the changing problems confronting the management of its national economy. To do the first effectively, the Bank should have devel- oped a thorough understanding of the country's development strategy by critically evaluating the major components to detect inconsistencies, fore- see problems in implementation, and predict the extent to which development goals could be achieved. To do the second well, the Bank should have moni- tored performance of the economy and developed alternative scenarios of its expar.s on path on stated assumptions regarding external variables as well as policy adjustments. This review attempts to assess the extent to which the Bank's economic and sector work has served this commitment. It fo- cusses on the Bank's sector work on industrialization and agriculture, and on its macroeconomic work including forecasts. The review goes on to iden- tify some important omissions in Bank economic work, and to judge how use- ful Bank work has been to country decision-makers. Sector Work 6.02 Tanzania's strategy and Bank lending coincided in giving high priority to development of the productive sectors in the 1970s. Unsurpris- ingly these sectors received much attention from Bank missions and studies. Some recent assessments of Tanzania's economic performance have placed great stress on the failure of the development strategy for one or the other productive sectors; some blame the agricultural sector strategy and others the Basic Industries Strategy.58 Without taking sides in this de- bate, a review of the Bank's studies and position in each case is necessary in order to see what basis there was for Bank lending and a dialogue on economic policy. Bank's Work on Industrialization 6.03 The Bank's study of Industrial Development in East Africa in 1971 was its first critical evaluation of the industrial development strategy of the East African Community. It identified the most important characteris- tic as the use of protection and incentive policies to spur industrializa- tion, and concluded that excessive protection appeared to have contributed to the establishment of many high cost and inefficient manufacturing firms, leading to a cost structure inimical to export and to user interests. The report noted interest in all three partner states to promote small-scale industries, and pointed out that policy orientation was unsuitable to 58/ See - Paul Collier: Aid and Economic Performance in Tanzania; Institute of Economics and Statistics, Oxford University, August 1987. Frances Stewart: "Short-term Adjustment Measures", in Basic Needs in Danger; ILO, Addis Ababa, 1982. K. E. Svendsen: "The Creation of Macroeconomic Imbalances", in Tanzania - Crisis and Struggle for Survival by the Scandinavian Institute of African Studies, Uppsala 1986. 51 achieve this objective. It recommended that existing levels of protection should be reduced, and that protection decisions should take into account prospective impact of projects; therefore project appraisal techniques were crucial. Regarding incentives, it argued that more emphasis should be placed on stimulating employment, efficiency and exports. In addition it recommended that production licensing should be reconsidered in the inter- est of fair entry and competition. These points are still valid and are reflected in the concerns of the 1987 Tanzania Industrial Sector study. Regarding Tanzania, the report seemed satisfied that after the initial uncertainties created by nationalization policies in 1967, it had succeeded in creating a clear and stable policy environment, compared with Uganda which took similar measures in 1970.59 6.04 The 1975 report--"Tanzania: Industrial and Mining Sector Survey" analyzed in detail the evolving planned, controlled, public sector domi- nated, approach to industrial development; and concluded that "there are practical circumstances which inevitably limit the effectiveness and there- fore, it seems, the appropriateness of a comprehensive system of direct controls." Citing especially the shortage of managers and administrators and noting the existence of a still fairly important private sector, the report went on to suggest that selective use of indirect controls and de- centralized decision-making--a change in the direction of market socialism- -might well be conducive to greater efficiency and industrial development. The report clearly stated that there was urgent need for the removal of uncertainties regarding the future role of private investment in Tanzania. Focussing on pricing the report regarded as potentially dangerous the fact that under the system of price control international prices had lost their significance as a check on the efficiency of domestic production. The report urged the review of the macro and micro-incentive framework, since Tanzania still had a large private sector and central planning was not yet comprehensive. Unfortunately, the larger share of the report was Cevoted to the identification of development prospects in various subsectors, and the critical analysis of the overall strategy appears not to have in- fluenced its position on the "Basic Industries Strategy" (BIS) which had been elaborated in preparing the 1975-79 Plan. 6.05 The BIS which was launched in 1974 after a two-year planning exer- cise consisted of two principal elements. One was to produce goods to satisfy "basic needs" for food, shelter, education, health and transport, and to create "backward linkages"; the other--to process locally produced primary goods for domestic use as well as for export. The 1975 report gave conditional support for the BIS and suggested (i) more emphasis on raising productivity in existing enterprises; (ii) expansion in consumer goods; (iii) higher industrial investment through joint ventures (iv) more atten- tion to implementation constraints and (v) emphasis on human capital and skill development.60 I/ IBRD - (Eastern Africa Department) Industrial Development in East Africa: Progress, Policies, Problems and Prospects, Volume I, Npril 16, 1971. fi/ Tanzania's Industrialization Effor. 1961-87, op. cit. Section IV Bank Sector Work and Views. 6.06 The BIS received cautious endorsement in the 1977 BER, based on the following arguments. First, the BIS should not be judged solely on efficiency and growth considerations since the political leadership was willing to sacrifice some growth in order to pursue the goal of self-reli- ance. Second, most of the selected import substitution industries appeared to be relatively efficient at world prices, due partly to natural protec- tion of transport and possibility of reaching minimum scale economies with- in a reasonable time span. Third, no other strategy was likely to generate more employment opportunities. Fourth, there was potential for efficient import substitution industries to develop at least a minimum export capac- ity. Finally the metals engineering sector would foster technological and skills development. 6.07 The mission, however, raised a number of arguments against the BIS. First, it would be costly in terms of foregone growth. A comparison of the BIS with a "maximum growth strategy4 suggested that, by 1990 real industrial value-added would be some 20% lower under BIS, with real GDP also 5% lower. Second, since agriculture would have to earn the foreign exchange for industry, there would have to be concurrent restructuring of both sectors at a prohibitive total cost. Third, the emphasis in the steel and metals engineering industries was premature. Fourth, in the medium term BIS would increase external dependence. Fifth, the planning required to exploit linkages would strain the country's planning capacity, and the required centralization of investment decisions would be inconsistent with the development of an inherently decentralized metals engineering industry. Finally, the mission was concerned that there was danger that if too much attention were paid to the long term, individual project decisions would be made without adequate project evaluation. Expressing concern with the issue of pace, the mission concluded that "perhaps what is called for is a gradual shift toward BIS.-61 6.08 Tanzania's industrial sector was also considered in the 1981 and 1984 CEMs. However, the main concern was with the ongoing economic crisis and hence the focus was on current performance and not on evaluation of long term strategy. The 1981 report attributed poor performance to under- utilization of capacity due to the shortage of foreign exchange to buy imported inputs and to maintain facilities including infrastructure, and made only passing mention of weakness in management and inadequacy of the cost and pricing structure. Rather scant treatment of industry in this report may reflect the fact that by 1981 the Bank was agreed that agricul- ture was the appropriate leading sector for Tanzania's development. While the 1984 CEM did not question the validity of the BIS approach directly, it did criticize the operation of the import licensing scheme and the system of price controls and confinement. Specifically targetted also were the dependence of foreign exchange allocation on lobbying strength, implying priority preference to parastatals, and the disruption of distribution associated with periodic price adjustments. The report made proposals for industrial restructuring which aimed at keeping new industrial investment in the parastatal sector to a minimum. Other proposals aimed at clarifying the role of private industry and allowing them access to the export earn- ings retention scheme, at applying better project evaluation to donor- b1/ Tanzania Industrialization Effort 1961-87: Op. cit., paga 30. - 53 - assisted projects, and the reevaluation of some doubtful ones already being implemented. The report also recommended review of industrial planning procedures, price controls on production of basic consumer goods, and ac- cess to export earnings by exporters. The implied intent was to make ad- justments within the context of the BIS, and to reduce the extent to which the pattern of parastatal investment was influenced by what donors were willing to finance. 6.09 A 1987 Bank study of the industrial sector faced the entire prob- lem of the soundness of the industrialization strategy.62 "The highly protected environment and the thrust of the Basic Industrial Strategy often resulted in uneconomical investment choice", though donor influence was also a negative factor. The constraint of skilled manpower was an often-mentioned issue. "Industry today is significantly over-extended in relation to the country's technological, skilled labor and managerial capabil- ities: infrastructure is inadequate, and the location of many plants (influenced by political factors) is inappropriate."63 6.10 The 1987 Report claims that, contrary to the common view (which was previously espoused by the Bank) lack of foreign exchange does not explain the poor performance of Tanzan.a*s industrial sector. Only 11Z of a sample of 118 enterprises scrutinizec by the Mission would be economical- ly viable in the long run even with full capacity operations. The analy- sis also showed that enterprises with negative value added were concen- trated in intermediate and capital goods subsectors, including "many large enterprises in the machinery, iron, steel and metal products". Large firms are significantly less efficient than small firms--a common occurrence in LDCs, but one, which, apparently has escaped the scrutiny of Bank experts. Parastatals are overrepresented in the negative value added group. Some of the statements made in the Report call for clarification, and there are issues that require further scrutiny, but the Report gives by far the most careful and comprehensive analysis of effects of application of industrial policies on resource allocation. Bank Work in Agriculture 6.11 Bank work in agriculture started with the pathfinding Economic Report of 1961, which significantly influenced Tanzania's early develop- ment strategy. Subsequent contributions of importance were limited to a 1974 Agriculture and Rural Development Sector Study and a 1983 Agricultural Sector Report both prepared by the Projects Department. 6.12 The 1974 study recommended that highest priority should be given to projects with an immediate impact on production, and lower priority should be given initially to social infrastructure serving equity/welfare objectives. It proposed a temporary halt to the villagization drive to 62/ IBRD: Tanzania: An Agenda for Industrial Recovery, June 30, 1987. §3/ Tanzania: An Aaenda for Industrial Recovery, June 30, 1987, Executive Report, Preface, page i. - 54 - minimize its adverse production impact, and suggested that the Government "should immediately begin to implement a range of policy changes and re- forms.. .particularly those concerned with marketing, input supply, exten- sion services and the proposed strengthening of the Ministry of Agricul- ture." Among constraints to agricultural expansion, commodity pricing was identified as needful of particular attention. The study also recommended that the allocation of resources to the agricultural sector should be sig- nificantly expanded under the Third Plan (1975-79). Unfortunately, atten- tion to the policy recommendations was diverted by the suggestion that the Bank consider supporting two new types of projects--a National Maize Proj- ect and a National Agricultural Development Project--a suggestion in line with the project focus of and Bank interest in lending.64 6.13 The 1983 Agricultural Sector Report went beyond the 1974 by sug- gesting that the appropriate development strategy for Tanzania was one in which agriculture would be the leading sector having highest priority in foreign exchange and budgetary resources, one in which the role of the public sector is reduced, and one which would assign highest priority in investment to regions of greater agricultural potential. It reiterated the need to improve incentives and specified that a major exchange rate adjust- ment would be necessary to sustain an increase in producer prices. The report also argued for the liberalization of input and output markets, and identified the needed short run measures including training, development of technical packages, and institutional changes. Finally, it pointed out the need for donor support, adjustment in donor programs, and greater coor- dination. These were the most far-reaching proposals for change in Tan- zania's approach to agriculture that the Bank had ever made. 6.14 With the Bank no longer following an expansive, "lending notwith- standing," approach to Tanzania, the 1983 study effectively determined.the official attitude of the Bank at the time--a distinct change from the 1974 situation when the primacy of lending over policy change essentially re- sulted in the proposal of project solutions behind an analysis revealing policy and institutional deficiency. The 1984 CEM in following up the themes of the 1983 report was quick to point out that the Cabinet paper considered in early 1983 had left out two important recommendations of the Bank's Agriculture Sector Study--flexible pricing and exchange rate policy and a more limited role for the public sector--both of which were to occupy an important place in the subsequent dialogue. 6.15 That so comprehensive a list of sector issues had to be mentioned in studies in the 1980s is partly reflective of the deficiencies of sector work before then. Although this work has improved over time, the quality of analysis has not always been good. Scant attention was paid to the socio/cultural and political dimensions of the development problem. As economic analysis, Bank sector work suffered from inadequacy of reliable data, and its usefulness for policy advice was sometimes curtailed by lack of follow-through, e.g. while attention has been given to pricing little has been done to estimate responsiveness of production to price incentives. fi/ See Review of Agriculture and Rural Development, Part II. - 55 - Effectiveness of Bank work has also been compromised by the fatlure to address differences with other 'nstitutions studying and advising Tanzania e.g. ILO on the issue of partial versus total supply elasticity of agricul- ture and priority of exports versus food security.65 Bank work has not shown much sensitivity to the need to prioritize and to sequence recommendations, a very important flaw given the human limitations Tanzania faced in designing and undertaking policy reform. At the micro level quality has sometimes been high and has permitted a fruitful dialogue in specific areas. Bank support for the smallholder as a key element to agricultural growth was an important contribution. 6.16 However, many issues had to be raised again because of earlier failure to communicate concerns over policies affecting agriculture. This must be attributed in large part to the dominance in the dialogue within the Bank of those groups responsible for seeing that lending targets were achieved over those concerned with the economic integrity of Bank interven- tions in country development. This dominance was due to an approach to self-evaluation by the Bank which stressed the immediately measurable indi- cators and ignored long-term developmental impact. Thus the Bank's financ- ing role became uppermost and its indicator--disbursement be.ame the prime yardstick of performance, and the development role and associated economic and sector work were of importance mainly to provide ex ante and ex post justification for the important activity. Significantly, sector work gained influence only when the pressure for expansion of lending to Tanza- nia ceased, that is when availability of funds to the Bank was constrained and other donors were cutting back support. Bank Work or. Parastatals 6.17 The role and performance of parastatals has been a theme frequent- ly revisited in the Bank's ESW; probably because in the early seventies the Bank generally supported the creation of parastatals, e.g. in livestock, sugar, tobacco, textiles, tea, and specifically supported the replacement of some crop cooperatives by marketing boards. As early as 1974 an Agri- culture Sector report pointc-d out that Tanzania's single channel marketing system with the final stage dominated by a parastatal suffered the disad- vantage of high costs due to a lack of competition. The report was not anti-parastatal; it went on to suggest the possibility of assigning whole- sale distribution to the State Trading Corporation. It also suggested that in the interest of efficiency crop parastatals shoul% not be assigned addi- tional functions. jL5/ ILO: Basic Needs in Danger--A Basic Needs Oriented Development Strategy for Tanzania; Addis Ababa, 1982. - 56 - 6.18 The 1977 BER, perhaps taking its cue from Tanzanian leaders' ex- pressions of concern over poor parastatal performance, included an in-depth examination of parastatals.66 The report considered these institutions mainly from the viewpoint of their contribution to the nation's investible surplus, and of their efficiency. It identified the main causes of poor performance to be: (i) scarcity of management cadres, (ii) weak incentives and sanctions, (iii) diffuseness in identifying objectives and responsibil- ities, and (iv) price setting procedures allowing inefficiency costs to be passed on in higher prices. Solution was seen to require twc broad based types of policies, aimed at improving management and technical efficiency and at reforming the environment for parastatal decisions by establishing a system for monitoring, evaluating and influencing them. Among suggestions for concrete action , the report mentioned, 'i) the reduction in over-man- ning, (ii) the restriction of the extent to which wage increases could be passed on in higher prices, (iii) the use of financial surplus as a basis for rewarding or penalizing managers, (iv) the reduction of subsidies from the Treasury. Significantly, the 1977 BER presaged future Bank positions by noting the misuse of monopoly power by marketing parastatals and by suggesting that one way to police them would be to allow some competition from the private sector. 6.19 The 1981 Economic Memorandum on Tanzania noted that the ratio of profits to receipts of financial parastatals had continued to fall, and that in general, their contribution to the economy had been uneven and disappointing. In 1983, the Agriculture Sector Report devoted a chapter to parastatals, supporting the steps taken by Government, some along the lines recommended by the 1977 BER, to improve their efficiency. These included the denial of overdrafts to parastatals, the strengthening of watchdog agencies, the shake-up of management and staff, aud the liberalization of the food trade. However, in addition to the problems identified by the BER, the report found that crop parastatals were experiencing severe li- quidity problems and were unable to cope with provision of the expected level of service much less augment them. Concluding that the rapid growth in number and the persistent mismanagement was due to the use of parasta- tals as a continuing vehicle for patronage, the report stated that changes in the system would have to confront vested interests; and hence the polit- ical commitment to change was crucial. In the chapters dealing with crop pricing and agricultural services the 1983 report attributed to parastatals a significant share of the blame for poor performance of the agriculture sector, and saw reform of these institutions as a key element of any pro- gram of structural adjustment. 6.20 In the agreement on structural adjustment reached between the Bank and Tanzania in 1986, parastatal reform was to be designed on the basis of a study to be undertaken jointly by the Bank and the Government. This study was the subject of the 1988 report - "Parastatals in Tanzania - Towards a Reform Program". The main proposals for reform include: (i) the §-6/ Budget Speech 1975/76 by Min. Msuya: "Those parastatals which fail to generate surpluses will have to be closed down." Also J. Nyerere's 1977 Speech: The Arusha Declaration Ten Years After; said "Our parastatals are not producing sufficient surplus to finance new investment" and "Every parastatal must examine its own record... and try and find ways to cut costs." reduction in their number, (ii) the elimination of preferential treatment, (iii) the elimination of discriminatory treatment, e.g. price controls, lack of managerial autonomy, and (iv) the establishment of a performance monitoring system. 6.21 It is interesting to note that between 1973 and 1982 the Bank lent US$ 174 million to six of the eleven crop parastatals, at the same time the above-mentioned concerns were being expressed in Bank studies.67 These lending operations had minimal impact in improving parastatal efficiency, partly because ESW was unheeded and there was inadequate attention to the basic institutional framework at the project design stage. Frequently, it was assumed that exis..ing statutory bodies could easily accept large increases in workload. Moreover, the Bank did not question the dependence on parastatals as the principal vehicle of development in spite of the paucity of managerial and skilled people to staff them; and Bank interventions during project operations containing a component to improve parastatal performance were generally ineffective. Macroeconomic Work 6.22 At the time of the 1959 IBRD Mission Tanganyika was a member of the East African Customs Union. Along wich the other members of the Union it shared a Currency Board system which, automatically, imposed limits on fiscal policy and on bank credit expansion. The mission assumed that the institutional arrangements would not be altered and, perhaps for that rea- son, its report almost entirely abstracted from macroeconomic issues. 6.23 Initially, the Bank concentrated on "real" aspects of the economy, while fiscal and monetary issues fell within the purview of the IMF. In the early 1970s, however, the onset of the balance of payments difficulties prompted the Bank staff to make so-called "resource gap" calculations in order to determine the country's finance requirements. As early as 1973 a Bank staff member pointed out that inappropriate polices (to which the Bank at the time paid scant attention) contributed at least in part to the in- crease in the "resource gap".68 However, the fact that, the "resource gap" cannot be used to calculate capital inflow needs, because ex post the two must be equal was mentioned only in the 1977 BER--and it did not stop the calculations. 6.24 The 1977 Basic Economic Report was the first major Bank document to deal with economy-wide, as contrasted with sectoral, issues. The BER noted that "[t]he policy of increasing and then maintaining a high rate of aggregate investment has been pursued with vigor and tenacity" (p. 38). jZ/ See: Vol. II of this study - Review of Agriculture and Rural Development; Section E: Results of the Lending Program. §_/ Memo: Tanzania-Countr Program Note, February 15, 1975. "Aggregate domestic savings rose until 1970, but then declined precipitous- ly, and, during the 1974/75 drought-cum-terms-of-trade crisis reached a historic low.69 The decline was ascribed to a shift of income from the pri- vate to public enterprise sector, to the increasing inefficiency of the parastatals, and to the mounting government consumption expenditure. A discussion of the external balance pointed to the Arusha Declaration and the call for self-reliance, was also the last year in a series during which Tanzania enjoyed a positive balance on its goods and non-factor services account."" Since then exports declined, reflecting agricultural stagnation. 6.25 Though the BER threw light on linkages between "real" aspects of the economy which with the Bank had been dealing, and the macro-and mone- tary aspects, the latter were still treated in a cursory fashion. Monetary and foreign exchange policy were virtually ignored. Replacement of quotas by tariffs was advocated to help rationalize production, but it was not even mentioned that the proposed changes would have a positive effect on fiscal revenues. The 1977 Liberalization Episode 6.26 The lack of attention to monetary issues may have been at the root of the ill-fated liberalization experiment of 1977. By that date Tanzania had recovered from the 1974-75 foreign exchange crisis, but industrial activity was severely hampered by the emergency "import confinement" mea- sures that were taken to restore Central Bank reserves. "Considering the recent increase in foreign exchange reserves of the country, the [World] Bank representatives stated [at a meeting with Tanzanian government offi- cials] that the government should now [i.e. late in 1977] consider permit- ting higher level of imports."71 6.27 The Government relaxed the controls. Unfortunately, the ..."re- laxation of the very strict import controls.. .led to a rapid increase in imports from $731 million in 1977 to $1,125 million in 1978. This relaxa- tion was one of our (i.e. World Bank] recommendations agreed at the time of the program credit in 1977. Between 1977 and 1978 the resource gap in- creased from $116 million to $597 million, the current account deficit increased from $19 million to $446 million, and the overall balance went from a surplus of $170 million to a deficit of $230 million in 1978."72 6.28 The Bank, as far as can be ascertained, limited its liberalization recommendation to the "deconfinement" of industrial inputs, but in practice the easing of restrictions appears to have been applied to consumer goods as well. Increasing imports of the latter were the main cause of the de- terioration of the external account; but also important were the imports of §_/ 1977 BER, p. 41. 2Q/ Ibid., p. 48. Z1/ "Tanzania-Annual Meetings" Record notes on the RVP meeting with the Government delegation, held on September 28, 1977. 2/ 1980 CPP, p.2. -1 3 construction materials, motorcars and other items associated with prepara- tions for the Group of 77 meeting in Arusha. But even if the Bank's advice were strictly followed, one can question its wisdom. The Bank was fully cognizant of the fact that, with the restoration of Brazilian plantations damaged by a frost, the coffee price boom was coming to an end, and that Tanzania's terms of trade were therefore likely to deteriorate. What is even more serious the advice does not seem to have been based on macroeco- nomic analysis: as far as can be ascertained, the Bank staff made na at- tempt to determine whether, given the fixed foreign exchange regime, and the fiscal and monetary policies pursued by Tanzania since the beginning of the crisis, liberalization would be compatible with the maintenance of overall foreign balance. World Bank-IMF Cooperatica 6.29 As Tanzania's crisis deepened, the need to coordinate sectoral policies with overall macroeconomic management became increasingly evident. In 1981 the Bank pointed out to the Government, that, export rehabilitation required higher prices to growers of export crops, and such prices could not be provided unless the currency were devalued.73 As to the determination of the required degree of devaluation, the Bank deferred to the IMF.74 Paradoxically, the !MF used some rough Bank staff estimates of desirable producer price increases as an input into a calculation of the exchange rate adjustment,75 and concluded that the TSh. should be devalued from TSh. 9.5/$ to TSh. 30-35/$. The Bank proceeded to make its own estimates based (a) on purchasing power parity comparisons, and (bj on an attempt to ascertain the weighted average of exchanges of actual official and black market transactions, coming out with a somewhat lower figure. The Government, fearing adverse income distribution effects, resisted all devaluation. In ensuing exchanges of opinion with the IMF the Bank advocated, mainly on grounds of political acceptability, a less drastic devaluation than the IMF demanded. 6.30 During the 1980s, the Bank's position drew closer to that of the IMF, and the Bank's staff gave increasing attention to macroeconomics. For instance, the Aide-Memoire of a 1983 World Bank Mission (in which an IMF staff member participated) discussed not only sectoral policies, but also putlic finance, the balance of payments problems, debt payment and capital flows. Improved debt management was included among the pre-conditions of financing of the recovery program. 6.31 The Bank's sectoral work also displayed an increasing attention to macroeconomics. By contrast to the 1984 Country Memorandum which devoted a 21_/ Memo to files by Loan Officer EAlDA, "Tanzania - Meeting between [RVP] and Tanzanian Delegation (held on September 28, 1981]", October 7, i981. 2AI Memo: Senior Economist to Chief, EAlDA, "Tanzania Agricultural Producer Prices and the Exchange Rate Impasse" July 3, 1983. D_/ Ibid. The IMF model is appended to "Macro-Economic Preconditions for a Structural Adjustment Program in Tanzania", December 22, 1982 transmitted in an OM from Chief EANEM to Director EA1, "Analysis of the Tanzanian Exchange Rate Question," December 23, 1982. - 60 - scant 6 pages (out of a total of 162) to macroeconomics, the 1987 Agenda for Industrial Recovery gave ample attention to the subject. For instance, the 1987 document analyzed the foreign exchange allocation system adopted for the period of transition to full convertibility, and found it wanting. "In effect the allocation of foreign exchange to industry by the BOT [Bank of Tanzania] has been driven by the objectives of supporting revenue earn- ers (beer, cigarettes) and keeping most enterprises alive, on the one hand, and by particular pressures, representations, and -A ho2.c decisions on the other." The impact of fiscal, monetary, and trade re&tmes on industry was also analy-ed. 6.32 As long as Tanzania maintained an internal and external balance, projects and sectoral work could be carried out without explicit attention to macroeconomic considerations. This was no longer possible in the post- 1973 peri.od, when administrative measures taken to eliminate internal and external disequilibria distorted the system. For a number of years, how- ever, the Bank gave scant attention to the global problems of the economy, and, until the mid-1980s Bank documents display only a rudimentary macro- economic analysis. Most recently, a solid macroeconomic framework is being provided both through increasingly close Bank-IMF collaboration and through the Bank's own studies. The Bank's Economic Forecasts 6.33 Medium-term forecasts are routinely prepared to serve as back- ground material for the Bank's strategy. The forecasts can also, poten- tially, be of use to the Government in its decision-making process. In what follows we shall consider first, whether the forecasts were suffi- ciently accurate to serve as a useful tool, and second, whether they were presented in a form useful for policy-making purposes. Forecast for 1966-1970 6.34 Table 8.1 gives a comparison GDP forecast by sector of activity for the year 1970, published in 1967, and actual realization figures. Table 6.1: 1970 INDEX OF GDP AT CONSTANT PRICES, BY SECTOR (1966=100) Forecast Realization Agriculture 137 113 Manufacturing 188 136 Mining 146 52 Public Utilities 146 148 Construction 157 156 Commerce and Banking 116 125 Transpa.-t 140 151 Servi-es 127 138 Monetary GDP 133 123 Subsistence 101 106 GDP at Factor Cost 124 118 Sources: Forecast: Prospects of Economic Development in East Agrig, Vol. III Tanzania, Part 1, Appendix A Table 29. Realization: 1977 BER, Statistical Appendix, Table 2.2 6.35 The forecast was reasonably accurate, albeit somewhat overoptimis- tic. However, agricultural performance was seriously overestimated--and this, considering the sector's importance, was a major shortcoming. Forecast for the Second Five Year Plan Period (1968-1973) 6.36 The World Bank forecast, as related in the 1970 CPP foresaw that during 1968-73 GDP would grow, on the average, at 6.5% a year, i.e. margi- nally faster than the 6.6% growth rate registered in the 1964-67 reference period. The forecast waz based on the assumptions that (a) in contrast to the reference period there would be no decline in terms of trade, (b) the gross investment/GDP ratio would increase from an estimated 15% in 1964-67 to a Second Plan average of 211, however (c) the incremental capital/output ratio would rise because of greater emphasis on social overhead investment. The growth rate forecasted by the Bank was "by coincidence" the same as the Plan figure. 6.37 The Bank's forecast of world demand for Tanzanian commodities proved to be broadly accurate.76 The terms of trade improved, reaching 103.4 in 1972 (1966- 100), and declined only in the last year of the Plan (in 1973 they fell to 91.9)77 Coffee prices, as forecast, remained strong, leading, until 1973, the rise in the all-export commodity price index while sisal prices, as forecast remained depressed.78 Table 6.2: UNIT EXPOR PRICES (1966-100) 1969 1970 1221 122Z 1973 Coffee 87 100 110 128 137 Sisal 79 70 71 80 166 All aeport crog 92 98 96 108 132 Source: Basic Economic Report, 1977, p. 158. 6.38 There was also, as forecast, a rise in the investment rate (Table 6.3). For the Plan period as a whole, the average gross investment/GDP ratio was 21.6% at current prices (16.6% at constant 1966 prices) vs. an average of 15.7% (15.6%) during the previous 5-year period. Table 6.3: INVESTMENT/GDP RATIOS AT CURRENT AND CONSTANT 1966 PRICES 1964 126 1966 196. 1968 19692 19Z0 12. 1972 1973 At current prices 12.8 14.6 15.5 17.9 17.8 15.6 22.5 26.4 21.7 21.7 At constant prices 13.3 15.0 15.5 16.9 17.3 15.1 21.2 24.4 18.9 19.0 Source: 1977 Basic Economic Report, Tables 25 and 26. :6/ The CPP does not indicate the numerical values of the terms of trade parameters on which the GDP forecast was based; we thus compare actual numbers with statements about the direction of change. 27/ Basic Economic Report, 1977, p. 164. 28/ The 1973 rise in sisal prices is the consequence of a drought that occurred in 1973 major East African sisal-growing areas. - 62 - 6.39 The forecast overestimated, however, the resulting increase in output. GNP growth rate, instead of increasing marginally over that achieved in 1964-67, declined in the 1967-70 period to 4.3% per annum on the average. The 1970-73 performance was somewhat better (4.7% per annum growth) but still far short of the 6.5% foreseen by the Bank.79 6.40 The forecast error, in aggregate terms, is traceable to an under- estimate in the rise of of the Incremental Capital/Output ratio: between 1965/66-1967/68 and 1968/69-1972/73 this ratio rose from an average of 2.85 to 4.26.80 In terms of sectoral performance, the Bank once again overesti- mated the growth of agricultural output, and, indeed, of all major export crops. Table 6.4: INDEX OF VOLUME OF MAJOR EXPORT CROPS, 1973 (1968=100) Bank Forecast Actual Sisal 95 60 Cotton 154 96 Coffee 133 123 Tobacco 318 137 Tea 150 142 Source: Computed on the basis of physical output forecast reported in the 1970 CPP, and of realization figures, Basic Economic Report, 1977, p. 158. 6.41 As Table 6.4 shows, overoptimism was particularly noticeable in the case of commodities whose output was expected to expand at a rapid pace. Output of cotton declined instead of rising, as expected by more than 50%. Tobacco output was expected to triple, Iut it grew by less than 50%. These were the commodities that were given a major emphasis in the Plan, and the shortfall is, in this sense, a Plan failure. 6.42 There is ample evidence that the Bank was fully cognizant of the difficulties facing agriculture, witness the warning in the 1970 CPP that production would suffer because of the on-going structural and administra- tive changes. The new institutions were not, as yet, working in a satis- factory fashion. State farms functioned poorly because "the present man- agers are not well qualified, although the techniques that have been ap- plied are quite sophisticated." In Ujamaa villages that were being estab- lished "there is.. .need for careful monitoring to determine the opportunity costs and to assess both economic and social impacts". In general, the emphasis on planning and administrative decision-making aggravated the already serious skilled manpower shortage. "The shortage of high-level manpower will be felt more in agriculture than in any other sector.. .Many of the expatriate staff now in Tanzania will soon leave, and it will be 22/ As new figures became available, the Bank scaled down its forecast: thus, in 1972 CPP we read that in 1970-77 the GDP is expected to grow, on the average, by 5.1% per year. 12/ The computation is based on constant 1966 price GDP and Gross Investment series. It is assumed that there are no lags. many years before adequate numbers of Tanzanians will be available to re- place them." In the case of cotton, "the (Plan] target may be difficult to attain unless a detailed production campaign is undertaken promptly." "Nationalizations and income-equalization policies have blunted incentives to produce." 'Finally, the imp'ementation of Tanzania's transport program is handicapped by skilled labor shortage, hence there is a potential trans- port bottleneck. Other productive sectors suffer from similar problems." 6.43 Even though the figures that showed a sharp decline of growth in the years immediately following the Arusha Declaration were no'-: yet avail- able, the Bank staff had access to, and took notice of, information that would have justified great conservatism in the making of a forecast. It thus appears that there was a communication gap between the staff wich recent field knowledge who prepared the CPP, and the forecasters, and that the latter did not sufficiently take into account the impact of institu- tional changes on the magnitude of functional parameters in the economy. The 1977 BER Forecast for the 1975-80 and 1980-90 6.44 The 1977 BER presented the results of a simulation projection of the Tanzanian economy that (1) indicated the likely long-run consequences of continuation of existing policies and (2) was applied to assess the benefits of policy reforms. Insofar as, in practice, few reforms were made between 1975 and 1980, realizations should be compared with the pessimistic version of the forecast. (Table 6.5). Table 6,5: 1976 "BASERUN" SIMULATION AND ACTUAL OUTCOMES (percent growth rates) "Baserun" Simulation Actual (at 1978 prices) 1976-80 1980-90 1973-78 1978-82 Private Consumption 3.6 4.2 6.la -2.3,L Public Consumption 8.0 8.0 Investment 5.2 0.4 4.3 -1.5 Exports 2.7 2.9 -5.8 2.0 Imports -0.2 1.6 -2.6 -8.2 Domestic Savings 8.6 1.3 0.5 16.8 Foreign Savings -12.2 -16.7 -0.2 -9.1 GDP at Factor Cost 5.4 4.8 4.7 -0.4 Agriculture 3.1 2.6 -2.9 Large Scale Manufacturing 12.3 7.6 -16.6 Public Administration 8.0 8.0 /g Total consumption. Sources: "Baserun" simulation: 1977 BER, Table 22 Actual figures: 1984 CEM 6.45 The BER warned that the "relatively unattractive prospects" pre- sented in the "baserun" may be overoptimistic on at least two counts. First, "declining foreign savings and the slow growth in exports leave little room for import growth...if the implied high rates of import substi- tution are, in fact, not attained, then.. .Tanzania will face potentially 64 unmanageable balance of payments problems." Second, "the baserun simula- tion foresees most of the domestic savings in the 1980s accruing in the form of corporate (that is parastatal) savings.. .recent history points to serious institutional difficulties encountered in keeping parastatal sur- pluses from being eroded... if the forecast surpluses are, in fact, not realized, Tanzania's growth will be even lower."81 The discussion ended with the statement that the Bank did not invest the particular numbers in the "baserun" with "excessive credibility": and that what the simulation did was to provide systematic insights regarding the main lines of Tanzania's future development if present trends and policies continue. 6.46 The "baserun" presented a picture of increasing economic difficul- ties that would occur in the absence of reforms. A comparison of the pro- jections with the actual outcomes shows the correctness of the broad brush picture, though the actual crisis was deeper, and it came sooner than in the simulation run. The optimistic version, that assumes the adoption of basic structural reforms, which were not put into effect, is difficult to judge, but it too, in retrospect, appears to have been realistic. This version foresaw that, with improved management of the economy, it should be feasible to attain, on the average, a 5.8% long-run annual growth of the GDP, with improved income distribution and increasing self-reliance.82 The simulation model, described in an Appendix allows for the performance of runs reflecting up-dated information and alternate policy assumptions. 1981 and 1984 Projections 6 47 The 1981 and 1984 CEMs reverted to presentation of a single pro- jection. (Tables 6.6 and 6.7) In both cases it was specified what assump- tions were made about the exogenous factors (e.g. the terms of trade) as well as the expected policy reforms. Table 6.6: 1981 PROJECTION OF GDP GROWTH RATES (% per annum at 1979 prices) 1966-79 1980 1981 1982 1982-85 1985-90 Actual Agriculture 4.0 -6.3 11.5 4.4 4.8 4.9 (food) n.a. (-8.0) (17.0) (3.5) (3.5) (3.5) (export) n.a. (-3.0) (3.0) (6.0) (7.0) (7.0) Industry 3.0 - 4.0 4.0 4.0 4.0 Services 5.7 4.0 4.0 4.0 4.0 CDP 4.7 -1.9 8.4 4.8 4.6 4.7 Source: 1981 CEM, Table 4.1. W1/ 1977 BER, pp. 85-87. _2./ 1977 BER, pp. 112-115. - 65 - Table 6,7: 1984 "MEDIUM-TERM SCENARIO" % ANNUAL GROWTH RATES IN REAL TERMS 1978-82 1983-88 Actual Projected Agriculture -0.4 3.2 Industry -2.9 4.0 GDP at Factor Cost -16.6 2.7 Source: 1984 GEM, Table 6.3 6.48 It is futile to compare the 1981 projection with actual outcomes, since only a few of the reforms advocated in the 1981 CEM came to be adopted. Reforms enumerated in the 1984 CEM were, for the most part, re- flected in the Structural Adjustment Program, but, until the launching of the ERP only a fraction of the reforms were put into practice. Conclusions 6.49 The World Bank forecasts have systematically erred on the side of optimism. Their usefulness to Tanzania was limited because of the fact that the assumptions were often given in imprecise form. Moreover, since the model was not specified it was not possible to re-run the forecasts on alternate assumptions--an objection which was raised by one of our interlo- cutors, Prof. Wangwe. 6.50 In situations where the exogenous setting is undergoing rapid changes, unconditional forecasts serve little purpose. It is also not possible to utilize such forecasts for policy-testing purposes. The simu- lation exercise displayed in the 1977 BER was a useful innovation which, unfortunately, has since been abandoned. It is suggested that, in the future, forecasts be presented in a form that clearly shows how economic reforms can contribute to the country's well-being. Evaluation of Bank ESW 6.51 The usefulness of the Bank's economic and sector work for guiding Bank lending decisions and policy formulation by country decision-makers depends on the extent to which (i) it identifies and treats relevant is- sues; (ii) it ranks issues according to their importance in the development process of the country; (iii) it satisfies the criteria of depth, correct- ness, and realism in the analysis of priority issues; and (iv) it provides guidance to policy formulation in terms of operationally feasible measures. 6.52 Bank economic and sector work was partly in response to Tanzania's requests, e.g. impact of oil price increases, fiscal implications of pri- mary education, and partly in response to Bank requirements for assessing creditworthiness; and as such always dealt with relevant issues. The tim- ing of studies was usually appropriate in that studies were done -hen they could have provided useful analysis and information to Bank and country decisionmakers. Although there seems to have been a fair degree of respon- siveness of Bank ESW to signals regarding what problems the country would - 66 - face as well as regarding its evolving strategy, e.g. the oil price crisis, and the basic industries strategy, Bank studies did not deal with many issues which in retrospect have proven important. 6.53 One major omission of Bank ESW was the failure to evaluate criti- cally the implications of the Tanzania's socialist development strategy announced at Arusha in 1967. Tanzania's development strategl before the Arusha Declaration was mainly influenced by the 1961 Bank report which was based on a careful study of development potential. It served very well the purpose of orienting Bank lending and as a basis for Tanzania's strategy formulation as long as there were no radical shifts in ideology of the ruling party. However, with the radical shift toward socialism after Arusha, Tanzania was committed to a planned, public sector led economy. In retrospect, it is clear that Bank studies did not concern themselves suffi- ciently with the implications of this strategy, especially regarding the requisite planning and administrative framework. The result has been that the Bank has only recently developed an adequate appreciation of how the process of national economic management works in Tanzania, particularly regarding the involvement of the political party. 6.54 As the major thrusts of Tanzania's strategy evolved, attention should have been given to their internal consistency and consistency within the strategy as a whole. But in the absence of timely studies the implica- tion of rapid villagization for agricultural expansion was not foreseen by the Bank until the economic crisis and near famine of 1974. While it is true that missions from time to time commented on these matters, the com- ments varied from optimism to pessimism; and a good overall appreciation was late in developing. Bank study and advice on the pace of these changes may have reduced their negative impact cn growth and economic stability. However, in the absence of a thorough study there was no basis for dia- logue; assuming that the Bank would have raised questions given the pre- vailing uncritical attitude. The Bank had been invited to appraise Tanza- nia's plans; but, while agreeing with the overall goals, limited its analy- sis to the matching of investment targets with projected resource availa- bility, and concluded that the targets were realistic, apparently without looking at the strategy as a whole. The Bank also failed to update the evaluation of the 1969-74 Plan when the decentralization was decided in 1972 and the acceleration of villagization started in 1973. 6.55 Another important omission in Bank ESW concerned the failure to analyze implications of the public sector investment program and the Bank's lending program on a regular basis. Ideally, the size and composition of both programs should have been planned on the basis of an awareness of the possible effects at the macroeconomic level, of intersectoral linkages, and of the gestation period of the various operations. In fact, it was a long time before the extent of Tanzanian overcommitment in terms of financial and manpower resources was appreciated and documented by the Bank. The persistence of infrastructure bottlenecks is evidence of the failure to have detected the lack of balance among sectors both in the country's de- velopment program and in the Bank's lending program, as well as of the failure to study and document the recurrent cost implications of capital developments. As late as 1981 an internal Bank memo had this to say "The major problem that we have seen in the past with the investment program has been its unrealistic size and its lack of priorities... .The first step is - 67 - to get them to agree that the Bank has an interest in their investment program and can make a useful input into it. This will be no small achieve- ment in itself". - a sad admission after 20 years of involvement in a client's development. 6.56 Bank ESW has been of variable quality when judged on the basis of depth, correctness, and realism of analysis of priority issues. Sector studies have been fairly consistent in raising issues about policy frame- work. Thus the 1974 and 1983 agricultural sector studies.in analyzing the problems pointed out policy shortcomings, but the Bank strategy implica- tions deduced were quite subservient to the dominant concept of the Bank's role at the time. Thus, the 1974 suggested Bank lending for new types of projects while the 1983 suggested more Bank dialogue and pressure for pol- icy reforms. The signal deficiency of agriculture sector work for many years lay in the uni-dimensional bias of analysis, with focus almost en- tirely on the economic and with scant attention to the socio/cultural and the political.83 Similarly in industry, the 1971 study of EAC industrialization raised many of the concerns regarding protection which have been raised in the 1987 Tanzania: An Agenda for Industrial Recovery, but earlier works and even the 1977 BER were equivocal in their approach, leaving the way open for tremendous Bank lending In support of a strategy about which there were significant misgivings in the Bank itself. 6.57 From the review of Bank ESW presented above one cannot argue that it always provided guidance to policy formulation in terms of operationally feasible measures, or was a perfect basis for policy dialogue. But the main failing was one of Bank strategy rather than of ESW. To begin with, Bank ESW seemed designed to serve the Bank's needs rather than the coun- try's needs. This is reflected particularly in -hose studies not initiated directly in response to country requests, e.g. CEMs and sector studies. The CEMs seemed initially oriented to the needs of the lending program. Although industrial sector work in the seventies identified major defects in policies and weaknesses in institutions, and made recommendations, firm commitments to implement them were never extracted from the Tanzanians. Moreover, as long as the Bank was committed to supporting the Government's strategy by extending project loans, critical policy advice by the Bank could be ignored by Tanzania. In many cases, Bank staff views critical of Tanzania's strategy were not able to influence the official Bank position no matter how well-based these views were in studies. Most often, however, the fragile data base on which most studies were done provided an opportun- ity for attacking and rejecting those views and minimizing their impact on Bank strategy. The unfortunate side effect was that far too little Bank effort went to improving the data base, so that later when the pro-lending bias declined and studies were needed to design specific measures of policy reform, the data base was and to a large extent still is unsatisfactory. 6.58 Some recent directions in Bank ESW are worth mentioning. The signs are that Bank studies are showing an increasing awareness of the need JJ/ See: Volume II - Agriculture chapter paras. 2.41-2.44. 68 to approach development from a multidisciplinary viewpoint. Of particular interest is the study of "The Politics of Agricultural Policy in Tanzaniao.86 Also significant in light of the earlier criticisms in this and the chapter on the policy dialogue, is the recent (1989) Report on Tanzania's public expenditures.87 Several new studies Gi the education system which provide a basis for the rethinking of Tanzania's education strategy have been com- pleted. Most notably, a new comprehensive Sector Review undertaken for the Bank by UNESCO, plus a study of the textbook situation became available in 1988. VII. THE POLICY DIALOGUE 7.01 The main objective of the policy dialogue is the transfer of in- formation to assist the client's economic directorate in making decisions, conducive to the setting and the achievement of realistic development goals. A secondary objective is to give the Bank a further opportunity to learn directly from decision-makers regarding the problems countries face, and the solutions they attempt, in trying to manage the development pro- cess. The review of the policy dialogue is to assess the extent to which these objectives have been achieved and to see what improvements need to be made in the way it is planned and undertaken. 7.02 The dialogue between the Bank and Tanzania focussed initially on development rtrategy. Subsequently, emphasis shifted to the problem of stabilization in the aftermath of the 1974 economic crisis, and in the 1980s, to adjustments in the policy environment. The main topics of dis- cussion under these headings will be reviewed in order to see (i) what advice the Bank gave, and (ii) how effective was its approach in transfer- ring information (analysis, data, experience in other countries), stimulat- ing further thinking, and learning about development. In addition, some important topics which were not adequately discussed will be identified. An attempt is then made to evaluate the management of the advisory process, focussing on the preparation for and implementation of communications. Finally, the issue of linkage between policy dialogue and lending is ex- plored, and the main lessons for the Bank are summarized. 86/ Ellen Hanak: "The Politics of Agricultural Policy in Tanzanian; paper prepared as part of the study "Managing Agricultural Development in Africa" being carried out in the Development Strategy Division, Development Researck. Department, Jan. 1986 draft. 87/ World Bank: Tanzania - Public Expenditure Review; Report No. 7559-TA. Development Strategy 7.03 The discussions between the Bank and a client regarding the out- standing policy measures and the public investment program through which the country implements its development strategy are an important indicator of the state of Bank country relations. During the first fifteen years of Tanzania's membership of the Bank, these measures were: (i) villagization of the rural population; (ii) nationalization of enterprises occupying the commanding heights of the economy; and (iii) decentralization of public administration.88 Villagization 7.04 Available evidence suggests that the Bank through its ESW and direct advice was influential in Tanzania's decision to experiment with village settlement schemes which formed the basis for the villagization program--the hallmark of Tanzania's development strategy. The Bank's 1961 Economic Report identified rural development as the crucial factor in the country's development prospects. It proposed a dual strategy for rural devclopment involving improvement and transformation; the establishing of village settlements being an important component of the latter. As early as 1963, notes of a Bank/IDA mission recorded that "The concept of villagi- zation as a means of engaging the African population more fully in the cash economy and of increasing the availability of economic and social services to them has the strong support of President Nyerere." It added that "After receiving advice of an Israeli expert, Mr. Ylan, the Cabinet decided to make village settlement an essential part of the development effort".89 A 1964 memo reporting on the draft plan stated that "(Unfortunately, the Bank survey mission report is responsible for much of the emphasis on resettle- ment and irrigation; this plus political pressure was too much for the Plan people)." The memo went on to say that villagization served a political objective and that no output will come from settlement schemes in the next five years.90 In 1965 the Bank suggested the inclusion of 'Transformation in Agriculture" among the topics for discussion by an impending Bank economic mission, and stated clearly "I can also express general interest in your Government's present Village Settlement Schemes".91 By the end of 1966 a Bank staff's back to office report declared "The transformation approach through settlements has been largely a failure".92 88/ See Chap. III: Tanzania's Development Strategy; presented earlier in this report. 89/ Memo to files, dated July 31, 1963 - "EAST AFRICA - Notes from Bank/IDA Mission, April-May 1963". 90/ Memo dated August 3, 1964. 91/ Letter dated March 3, 1965 from Director, Africa Department IBRD to Minister of Agriculture. 92/ Back-to-office Report dated December, 1966. - 70 - 7.05 The Tanzanians also recognized that the pilot settlement schemes had failed, but they did not abandon the concept. They believed that the schemes had failed because they were capital intensive, produced the wrong crops, and used unsuitable technology. In any event this type of settle- ment could not be replicated on a nationwide scale because of high cost. Their post Atusha approach was a scheme based initially on self help with minimal government provision of basic infrastructure. This proved insuffi- ciently attractive. Even after added incentives were introduced, villagi- zation progressed slowly. In 1973, villagization was made compulsory, and within the next three years about tv-thirds of the population had been moved into villages. 7.06 Despite having originally espoused the settlement approach and having had second thoughts about it, the Bank did not follow up the radi- cally changed approach to end scope of the new villagization program. Thus, initially it did not understand the potential economic impact, and was not in a position to recommend modifications in this or other programs to minimize the negative impact. There is evidence of concern within the Bank, particularly in the Regional Mission to East Africa, regarding the impact of this new type of villagization; "The application of new social systems to production objectives is at best unproven".93 However it was not until the discussion of a Program Loan to cushion the oil price crisis, that the Bank mentioned "rephasing of villagization--return to a voluntary basis" among the possible policies for improving growth and the balance of payments. Significantly, the raising of the issue at that time coincided with Bank expression of its concern over the slow pace of project implemen- tation.94 Villagization had caused slowdown of some Bank financed agricultural projects, e.g. Geita Cotton, where the movement of the entire population of Geita into villages without prior notification of the Bank radically undermined the project.95 There is an indication that the Government later replied saying it had instructed local officials to go more slowly with villagization.96 But the Bank accepted that following massive uiamaazation in 1974 the Geita project would have to be redesigned, and this was confirmed to President Nyerere early in 1975.97 93/ Memo dated Feb. 15, 1973 from RMEA to Headquarters ret Tanzania- Country Program Note. 94/ Memo to files dated October 14, 1974 - "Tanzania: Discussions with the Tanzanian Delegation to the Annual Meetings". 95/ OED: Operational Policy Review - The Supervision of Bank Projects; Report No. 2858. 96/ Memo of Nov. 5, 1974 by RVP recording discussion on Tanzania with U.S. Exec. Dir. 97/ Letter of Feb. 21, 1975 from Pres. McNamara to Pres. Nyerere. - 71 - 7.07 Even at that late stage the Bank had not come to a determined point of view on villagization. A May, 1975 Country Note discussing the "sharp nose-divem in the Tanzanian economy still said i 'It is too early to say whether the villagization of 6-8 willion people during the past few years will contribute to agricultural productivity, but the potential is there*. However it was realistic enough to recognize Othe danger - social expectations created through villagization way prevent the shift of re- sources into directly productive investments needed to lessen dependence on foreign aid".98 The final record of any di6cussion of this topic showed clearly that the Bank had accepted as a fait accompli Tanzania's villagiza- tion strategy. It stated 'These problems are, of course, of direct rele- vance to the need which we discussed, to develop within the villagization framework practices designed to reduce soil fertility depletion and over- grazing which may threaten the longer term viability and stability of the new settlements". 7.08 The question that must be asked is why there was not more discus- sion of this important topic, to which CPPs from 1970 to 1975 devoted attention. There are some indications that villagization may have been seen primarily as a political rather than an economic policy, and therefore essentially beyond the range of legitimate interest of an international economic development agency. OThe Government is vitally interei.l.ed in making a success of the Ujamaa villages not only out of concern for the rural population, but as an important exercise in self-help which is vital for the success of Tanzania's Plan".100 As late as 1975 the CPP was trying to find a positive aspect to villagization as a political measure. It said "the accelerated villagization program whatever its demerits in terms of short-run production disruption, showed that the Government can also move forcefully against rural interest grcups." 7.09 There was also a tendency to reserve judgement on effects of the program on agricultural production, and to accept the views of government officials. 'Government officials at all levels vehemently deuy that the emphasis on Ujamaa villages will lead to any misallocation of resources.0101 Also, there were indications of a mindset within the Bank during the early seventies which, in looking at Tanzania's intensely ideological approach refrained from criticism of policies that were not overtly socialist. Thus the 1974 CPP in discussing villagization took comfort in the fact that while the productivity of collectivized farms was lower than on private plots, only a small portion of agricultural production had been collectiv- ized so far. 98/ Tanzania - Country Note, dated May 19, 1975. 99/ Letter dated June 2, 1977; RVP to Pres. Nyerere. 100/ CPP dated May, 1971; para. 36. 101/ CPP dated J-ne, 1970; para. 35. - 72 - 7.10 Although the reasons must remain a matter of conjecture, the con- clusion to which one must arrive on the basis of the available record is that there was minimal dialogue between the Bank and Tanzania regarding this important aspect of Tanzanian development strategy. This meant that not only did the Bank not warn of impending difficulties for the economy, but it also failed to learn from a unique example and be better able to advise another client, if a similar situation were to arise elsewhere. The 1972 CPP admitted that 'There are no close parallels in Africa or elsewhere for this ujamaa movement and it is too early to assess what the economic implications are likely to be." Clearly this could not be an adequate ex- cuse in 1974 and afterward for not studying and discussing with the Tanza- nians their experience in this important experiment. Nationalization 7.11 After the Arusha Declaration of January 1967 the Bank, concerned that the declared intention to nationalize the commanding heights of the economy would discourage private investors for a long time, sought assur- ances that the nationalization was a once only measure and that adequate compensation would be paid. Bank thinking was very clear. "However, (the] sic, need to examine arrangements for compensation, and eventually study effects on economic performance was recognized. Failnre to provide ade- qua.x :-impensation or a greater effect of nationalization measures on the econ.y than was expected, could lead to a reconsideration of our lending po1tcy.1102 Discussions led to assurances by Tanzania that there would be no further nationalizations beyond those already announced, and that com- pensation would be based on a negotiated settlement between the Government and owners of the enterprises. 7.12 Indications are that the Bank continued to monitor Tanzanian ac- tivities involving government acquisition of private property. The CPP of May 1971 noted that payments for assets had been made on schedule for the last four years, and that most enterprises continued to be efficiently managed--often under the old management. In late 1970 the Bank took note of the Rental Properties Acquisition Act, and warned of the impact on in- vestment and migration of Asians. A Bank mibsion went to Tanzania in March 1971 to assess the situation, and reported that reasonable progress had been made in the settlement of claims and that there was reasonable pros- pect that the bulk of outstanding claims would be settled.103 7.13 It is difficult to determine the extent to which clear and prompt Bank communication on nationalization affected Tanzania's decision not to continne to use this tool. The UK had also complained about the treatment of British subjects under the Acquisition Act; a fact which caused a brief delay in the presentation of the Smallholder Tea Project to the Bank Board in 1970. With the Bank's position unambiguously in favor of restricting 1021 Memo to files dated May 3, 1967 :"Tanzania - Lending Policy'. 103/ Back-to-office report, dated October 8, 1971: Economic Mission to Tanzania. nationalization, affected countries eaw their influence on Bank lending as a means of getting the attention of the Tanzanians. Also the Tanzanians must have recognized the need to avoid crcating uncortainty which would have adversely affected the investment climate. The fact that the Bank was presenting the same argument may have been helpful to those in Tanzania who favored a more moderate approach. Decertralization of Administration 7.14 Early in 1972, the Government of Tanzania decided to decentralize public administration. Under this scheme, 18 regional governments and 64 districts were given substantial powers to control budgets, personnel, programs and planning in their jurisdictions. The decision to decentralize triggered frequent rotation of key personnel; and the Bank feared that as the ministry headquarters staff was being seriously depleted, administra- tive capacity at the center would suffer in the short run. 7.15 The Bank dispatched a mission to prepare an updating memo which would concentrate on the development implications of the decentralization scheme. In its report the mission agreed that the scheme complemented and paralleled the Government's priority for rural development, and that it, could measurably improve planning and project preparation at the grasw roots level.104 7.16 The Report of the mission was patently optimistic. Within montas the Bank' -arly fears were being realized. The Bank raised the problem at a meeting with a Tanzanian Delegation in the fall of 1972. 'From the view- point of Bank Group operatives in Tanzania, an immediate problem being experienced was that the diffusion of experienced administrators and tech- nical personnel into the regions had led to manpower constraints at the center, which would inevitably affect both project preparation and imple- mentation, in the imediate future.s105 But as the 1973 CPP plainly showed, the Bank's concern was mainly for its project pipeline rather than for the negative developmental impact of decentralization. It noted that "The Government expects that the country,s sabsorptive capacity" will increase as a result of the Decentralization. During the current transitional period, however, project p=eparation and implementation capacity seem to have declined temporarily as a result of the large-scale transfer of staff to the Regions and the reassignment of many who remain in Dar es Salaam. We propose to make a special technical assistance effort during this transitional period in order to increase our project pipeline.*106 104/ Back-to-Office Report dated May 11, 1972. 105/ Memo to fi-es: Meeting with Tanzania Delegation to the Annual General Meeting - September 26, 1972, dated October 12, 1972. 106/ CPP dated March 13, 1973; para. 10. 7.17 Subsequently there was renewed interest in the topic by the Bank, motivated by general concern with the economic crisis associated with oil price in1crease and drought. In a 1974 comment on the recent economic de- velopment and prospects the Bank observed that "The recent decentralization of Government is proving much more costly in terms of the current budget expenditure than had been anticipated.110 As part of its effort to advise Tanzania on the management of this crisis the Bank undertook a study of the fiscal aspects of Tanzania's decentralization of administration, wnd at the end of 1974 communicated to Tanzania the main findings. 'One of the main conclusions of the draft report is that the new system of decentralized budgeting and centralized revenue raising in combination with the Government's health, education and rural water development targets present the danger of a recurrent expenditure explosion.'108 7.18 Later, Bank interest in decentralization continued to be dicuated by concern over the implementation of the lending program. The delays and failure of the 1974 Highway Maintenance project were attributed to frequent changes in administrative arrangements. In the Ministry of Communications and Works, the major effect was that planning and implementation both of new works and maintenance remained deficient and undermined the effective- ness of Bank projects in this area.109 But the problems extended to other areas. 'It is now clear that administrative problems of decentralization extend into all sectors active in rural areas, e.g. agriculture, roads, health, water, education, etc. and resolution of such administrative prob- lems essential to orderly implementation of projects in these sectors." 7.19 From the available information and given the persistence of the problems, it would seem that the Bank/Tanzania dialogue on decentralization was largely ineffective. The Bank did not transfer t. the client adequate information to help in decisions which would have cushioned the problems, and did not put itself in a position to learn much from the Tanzanian ex- perience. Part of the reason for this is that the Bank had rather limited interest, deriving from concern with its projects and with stabilization problems during the 1974 crisis, which dictated the nature and frequency of its interventions. Another part of the reason must 1- the general absence of a critical attitude to a developmvz strategy, the-broad goals of which were supported by the Bank.110 The attitude is also reflected in a statement in the 1974 CPP that "A revolution of the kind attempted by 107/ IBRD: "Tanzania: CPP Strategy Memorandum"; dated Jan. 18, 1974. 1081 Letter dated Dec. 10, 1974 from the Bank to the Prin. Sec. Prime Ministers Office, Dodoma. 109/ See Volume Two - Sectoral Relationes Bank Activity in the Transport Sector - III -The Policy Dialogue, pp 3.02. 110/ A 1974 letter from the Bank's President to a senior minister recognized that 'we in the Bank find ourselves in accord with your Government's objective to carry the benefits of economic development to the mass of the Tanzanian peopleO. Tanzania cannot be accomplished without painful adjustments and it is difficult to see what the Bank can do to ease the problems.* 7.20 This was matched in practice by the absence of a continuots inter- change on development prospects and policies, within which the Bank may have got early warnings of Tanzania's intentions before thec! were en- shrined in Cabinet decisions. The attitude in the Bank in the early seven- ties seems to have been one of avoiding discussion with Tanzania once a policy had been announced. Such discussion could have been helpful in clarifying procedures, and may have been acceptable once it was made clear that no challenge to Tanzanian sovereignty was intended. Apparently, the Bank's development advisory role was given much lower priority than its financing role and the Bank was not prepared to risk a discussion that could turn confrontational with possible damage to lending prospects. Public Investment Plans 7.21 There has been a long record of Tanzanian requests for Bank assis- tance in preparation and review of its public investment plans. Each occa- sion provided an opportunity for liscussion of the principal vehicle for government intervention in the country's development. As early as in 1962 Tanzania asked the Bank to provide an advisor on planning public invest- ment. There is no indication that the Bank granted this request. But it did send a team to review the draft 1964-69 Five Year Plan, and in 1965 agreed to provide a development advisor, both at the request of the Tanza- nians. In 1969 the Bank was asked and did review the 1969-74 Plan. While finding the targets achievable the team was concerned about the mobiliza- tion of domestic resources; and in 1971 a Bank team went to study the pub- lic finances, specifically the availability of public sector savings to finance the Plan. These requests and statements by the Minister of Finance that he would rather see in-depth economic reporting missions timed to fit more smoothly into the Government's own planning processes, suggest that Tanzania would have welcomed Bank participation in investment planning.111 7.22 After 1971 Bank involvement in Tanzania's public investment plan- ning seems to have declined, and it was not until the drought and oil price crisis in 1974 that the Bank was again invited to provide advice; this time on the fiscal effects of decentralization of administration. For the next three years Bank/Tanzania communications on public investment were con- cerned only with stabilization aspects rather than with content of the program. Thus in 1976 it was the recurrent cost implicatirns of social investment targets that was the focus of discussions. In 1977 it was the 111/ Memo to files: Talks in Tanzania; dated March 31, 1971. overall size of the program, specifically the issue of overcommitment which was the central issue of high level interchanges.112 Significantly, there is no record of a request from Tanzania that the Bank review the 1974-79 Plan. Further discussion between Tanzania and the Bank on the public investment program did not occur until 1981. Bank interest at that time was in getting an assurance from the Tanzanians that although macro considerations dictated a much curtailed investment program 'new Bank projects could be situated satisfactorily in the Government's revised plans'.113 7.23 Over the years leading up to 1981 there had been a significant decline in Bank participation in Tanzania's investment programming exer- cises, with a corresponding loss in opportunity to influence its content and size. The extent of deterioration in the dialogue on this matter is reflected in a 1981 internal Bank memo which said "The major problem that we have seen in the past with the investment program has been its unrealis- tic size and its lack of priorities... The first step is to get them to agree that the Bank has an interest in their program and can make a useful input into it. This will be no small achievement in itself'.114 7.24 Since 1982 there has been a resurgence of discussion of the public investment program both as regards content and size. This has come about as a result of the negotiation of a structural adjustment program and Bank assistance in the allocation of scarce foreign exchange. Focus of the program has been on provision for a minimum of new initiatives in order to allow resources to be devoted to the rehabilitation of existing capacity and to provide recurrent inputs so that capacity could be more fslly util- ized. 7.25 The dialogue on public investment planning has been less useful to both sides than it could have been, mainly because of a lack of continuity. Thus the problem of overcommitment arose during a period when there was little Bank participation in the preparation and review of the annual development budgets. This was before the Bank established its Resident Mission. There is evidence that the Bank's Representative was regarded by the Tanzanian Government as a source of advice on budgetary and other mat- ters, which may have helped to maintain Bank/Country communications on these issues. However, ad hoc advice by the Representative would not have carried the same weight as a Bank mission or staff assigned to help the Planning Office would have had. 112/ Letter dated Junq 2, 1977 from RVP to Pres. Nyerere; Odanger of overcommitment in relation to the available financial, manpower and institutional resources was real". 113/ Memo dated May 1, 1981 from Loan Officer EA1DA to Div. Chief EA1DA - Tanzanias Review of the Public Investment Program and its Relationship with our Lending Program. 114/ Memo dated harch 11, 1981 from Economist EA1DA to Acting Director EA1 - 'Public Investment Program in Tanzania". 7.26 From the repeated requests from Tanzania for assistance, it is clear that they would have welcomed Bank participation and advice But the Bank in the early seventies seemed to have been reluctant to be involved in what appeared to be technical assistance and to play a role in which policy and budgetary/fiscal measures may have been attributed to its influence. Part of this reluctance may have been due to the higher relative priority given by management to the Bank's lending compared with advice in develop- ment and national economic management. Part may have been due to the wish to avoid telling the Tanzanians the exact size and content of the Bank's lending program in order to retain Bank flexibility. As late as 1981 a Bank memo confirmed that "we have not in the past provided comprehensive information to the Tanzanians on the size and contents of the lending program".115 This also was the substance of a comment by a high level Tanzanian official in 1987 to the OED mission preparing this report. 7.27 Since the Bank, the Fund, and the donor community reached agree- ment with Tanzania in 1986 in support of its Economic Recovery Program, there have been several meetings of the Consultative Group at which the public investment program has been discussed. Once again the Bank has the opportunity of develop and maintain a dialogue through which its abundant experience in other countries may be made to benefit Tanzania's crucial resource mobilization and allocation efforts. The Aftermath of the 1974/75 Crisis 7.28 The economic crisis caused by the first oil price hike by OPEC in 1974, by drought and by rising food import prices focussed and fueled the warm and friendly dialogue after 1973. Although initially concerned with the slow rate of disbursement of Bank financing, discussions quickly turned to the requirements for bridging the evolving balance of payments gap and to the short term stabilization measures required. A Bank team sent to Tanzania to assist in a study of the required response to the oil crisis conveyed its findings to a Tanzania Presidential Task Force which debated and accepted them as the core of its report to the President and to Cabinet. Tanzania's willingness to accept these findings and to make po- litically difficult decisions in the fiscal, monetary and incomes policy areas made a favorable impression on the Bank. 7.29 One thread of the discussions during 1974-77 was about the gap in the budget and the shortage f foreign exchange. Bank studies on the re- current cost implications of universal primary education and universal primary health care, the fiscal effects of decentralization, and an export sector study provided the necessary material for the frequent :nterchanges between Bank staff and Tanzanian officials. The Program Loan and Program Credit approved during this period also provided opportunity for structured interchanges on these issues. It was a characteristic of the dialogue at the time that the Bank would look to the Fund to carry the discussion of macroeconomic projections and policies. Thus monetary and exchange rate 115/ Memo dated May 1, 1981 from Loan Officer, EAIDA to Chief, EAlDA. issues were not usually included in Bank/Tanzania talks. The result was that economic policy discussions lacked an important dimension in the ab- sence of Fund; which partly explains why the Bank pressed for and Tanzania agreed to relan import controls, in the absence of monetary or exchange rate action to defend the reserves.116 The lesson was not lost on the Tanzanians; and when the Minister of Finance met Bank President McNamara in 1979 he requested that 8 the Bank and Government begin discussions on a program loan and that these discussions and preparation of a program loan proceed in parallel with IMF discussions".117 7.30 The other main thread of the dialogue was woven around Bank criticisms and cautions concerning development strategy and policy, e.g., villagization threats to the environment and the need for satellite villages, pricirg, the implementation of development projects, and the implications of the disintegrating EAC.118 The preparation of the 1977 Basic Economic Report provided the opportunity and incentive for the most comprehensive conversations between Bank staff and Tanzanian officials on development strategy. The Government's official response was to discuss the analysis and recommendations relating to management of the economy and to ignore those concerning national development strategy which were considered of a political nature.119 However, it is believed by some observers that the draft encountered such intense hostility at all levels that successive drafts were believed to have been diluted in an attempt to salvage the dialogue with civil servants.120 Thus was validated the fear expressed in a Bank memo that *although it is clear that our assistance is sought, valued and respected by the policy-makers and the bulk of the bureaucracy, our exposed position clearly renders the Bank vulnerable to misinterpretation both within and outside Tanzania.'121 7.31 By the end of 1978 the economy was again in crisis, and Tanzania requested a program loan. The request did not trigger a resurgence of the . dialogue; probably because of a more cautious attitude by the Bank toward a role in short-term stabilization, and because of Tanzania's involvement in a war with Uganda. For the next two years, such dialogue as there was, tended toward increasing disagreement as to the causes and cures of the economic malaise. Tanzania pointed to external causes such as the break-up U of the East African Community, war with Uganda, and oil price increases in - 1161 See Memo to files dated May 26, 1977: Tanzania - Mr. Wapenhan's Visit, May 6-12, 1977. M 117/ Memo to files dated April 9, 1979. See also Chap. VIII - The Bank's Economic and Sector Work; section of the 1977 Liberalization Episode. 1181 Memo dated May 16, 1976: The National Pricing System of Tanzania. 119/ Based on interview with a former staff economist in the President's Office. 120/ Paul Colliers Aid and Economic Performance in Tanzania; Op. Cit. 121/ Memo from RVP to Bank President, dated June 2, 1977. 1979, and believed the cure to be a large injection of external financing. The Bank took the position that however important the external causes might have been, defective internal policies and institutional weaknesses were contributory factors. Tanzania could do nothing to reverse the external causes, but it could and would need to make fundamental adjustments in its policy and institutional environment. 7.32 Apart from this disagreement, the course of the discussion was made more difficult by Tanzania's belief that Bank advice had become taint- ed by closer collaboration with the IMF. This belief was reinforced by the reluctance of the Bank to consider a program loan without a Standby Agree- ment between Tanzania and the Fund, although the Bank had made the 1977 program loan in the absence of an extant agreement. In a New Year's Eve speech to the diplomatic community in December 1979 President Nyerere de- scribed as *strange and repugnant (was] the attempt by the IMF to exploit those difficulties in order to interfere with the management of our econ- omy..." and added that "indeed we have already heard hints from some quar- ters that money or credit will not be made available to us until we have reached an understanding with the IMFO--a not too veiled reference to the Bank. 7.33 In retrospect the course of discussions was adversely affected by the fact that the boom in coffee prices, by strengthening Tanzania's bal- ance of payments and revenues, made adjustments in policies and the manage- ment of the public finances less urgent. It also diverted attention from internal to external factors as the causes and cures for the country's development and stabilization problems. Furthermore, events such as the breakup of the EAC and the war with Uganda commanded such attention from the political leadership and senior officials that there was little time for, or interest in, long term development matters. Finally, the second round of oil price increases in 1979 once more drew attention to external causes of the country's economic problems. All these events constituted a severe blow to the Tanzanian economy, which was perceived by the Tanzanians as having evoked little sympathy and assistance from the international community. In these circumstances, Bank criticism of the development strategy was hardly welcome; and Bank reluctance to provide a program loan without linkage to a Fund standby after 1978 invited its classification among the unsympathetic for whom there was scant time for conversation during a period of national emergency. Structural Adjustment - 1980-86 7.34 Against this background Bank President McNamara visited Tanzania in January 1980 and initiated a new phase in the Bank/Tanzania dialogue with the emphasis on structural adjustment. The message he brought from the Bank was clear, unambiguous and realistic. It was that "Tanzania was one of many countries confronted by serious economic problems as a result of some permanent changes in the world economic environment--rapidly in- creasing oil prices and slow growth rates of OECD countries, which had dramatically altered the economic situation for all countries and required adjustments by all". The Bank was considering a new form of assistance- -structural adjustment loans, which would be quick disbursing and supportive of a program of adjustment measures by recipient countries. For Tanzania the Bank was prepared to consider structural adjustment loans in several installments over the next five years, and to work closely with the Treasury in designing the required adjustments. The message ended on the optimistic note " that it was possibl- to make the required structural adjustments while maintaining the pace of economic and social progress,; but no doubt was left regarding the linkage with a Fund program. 7.35 After reaching agreement with the IMF on a Standby in September 1980, Tanzania submitted a request for structural adjustment assistance. The Bank's reaction was that the proposed program was very ambitious (ex- port targets 252 over previous year) and did not adequately address the measures needed to sustain growth in the long term. However it agreed that Tanzania could opt for a less than full structural adjustment operation- -the more limited Export Rehabilitation Credit (approved in April 1981), and that the Bank would assist in the design of a more suitable program. This agreement did not indicate that easy communications between Bank and client had been restored. "The length of the discussions leading to the recent Export Rehabilitation Program was a clear illustration of diverging views, and it is these rather than a consensus on important issues, which now characterize our discussions with the Tanzanians.f122 7.36 Meanwhile, there had been a virtual breakdown in discussions be- tween the Government and the Fund. Access to Fund resources was inter- rupted in December 1980 when the country failed to meet certain performance targets. Discussions of a possible EFF credit started in March 1981 and the Bank's ERC was approved in April, but the agreement on the EFF did not materialize in June 1981 as had been hoped. President Nyerere later ex- plained to the President of the Bank that he was not anti-Fund or anti- devaluation; the question really was one of magnitude, and he felt that the Fund was constantly raising the ante. 7.37 By the time of the annual meetings in 1981 the Bank had become uneasy over the slow progress in areas covered by the Memorandum of Under- standing attached to the ERC Agreement. In discussions with the Tanzanian delegation disagreements developed over the meaning of "consolidation" of the development budget, over the relative importance of price and non-price constraints to agricultural expansion, and over the pace at which certain measures could be taken. The dialogue became even more difficult when the Bank revealed its reluctance to go ahead with the proposed and already appraised rural development project in Mara region, to appraise a second ERC, and to organize a meeting of the Consultative Group before access to IMF's facilities had been restored to Tanzania or prospects for an early agreement improved. 122/ "General Background to Tanzanian CPP" dated Aug. 20, 1981 - draft by Loan Officer. - 81 - 7.38 The Bank had offered and Tanzania accepted the services of a Tech- nical Advisory Group (TAG) to assist the Government in preparing a compre- hensive program for economic rehabilitation and recovery. The Group as- sembled in Dar es Salaam in August/September 1981. The use of impartial advisors selected with Tanzanian approval skirted the problem of suspicion of ideological taint referred to earlier, and avoided the appearance of Bank meddling in Tanzania's po'icy making process. The TAG presented its report in April 1982, capturing the attention of the policy-makers and provoking considerable debate in the Cabinet. The dominant view in the discussions favored adoption of its major recommendations which largely determined the content of the Structural Adjustment Program (SAP) sent by the Government to the Bank a few months latir. 7.39 In the fall of 1981 the new President of the Bank visited Tanzania to continue at the highest level the discussion on adjustment.123 From all accounts the conversation was largely at cross purposes. Focussing on the severe foreign exchange crisis, which was throttling production and undermining fiscal integrity, the Tanzanians appealed for short term balance of payment support. The Bank insisted that its comparative advantage was in longer term assistance, and while it was willing to assist on the basis of a medium term recovery program prepared with the help of the TAG, the first agreement to be reached by Tanzania had to be with the Fund. With the report of the TAG still some months away, Tanzanian disappointment with the dialogue was not surprising. Reflecting their frustration the Party put forward its own survival plan early in 1982. Bank review of the main proposals found them to be based on unrealistic assumptions regarding the recovery of exports in the absence of structural adjustment measures. Based on the TAG report the Government formulated the SAP which it submitted for Bank consideration in July of 1982. 7.40 The discussions of the Government's adjustment proposals contained in the SAP confirmed that there was broad general agreement between the Bank and Tanzania on principles although not on exact magnitudes of public sector expenditure cuts and of price adjustments.124 This is not surprising since frequent Tanzanian requests for specific advice on what the Bank would regard as the minimum conditions for a SAL were never satisfactorily answered. Part of the reason for this was that there was no consensus within the Bank regarding conditionality. It was suggested by 123/ Memo to files dated Dec. 17, 1981 by Chief, EAlDA: "President Clausen's Meeting with President Nyerere of Tanzania". 124/ Back-to-Office report dated Aug. 12, 1982 of the first mission to review the SAP said "At this stage it would help if the Government receives from us a clear statement regarding our view of the shortcomings". It went on to say "in the coming months we need to do the following: ...We should define a possible SAL programme. This should take the form of a minJmum set of conditions necessary for recovery/halting deterioration in the Tanzanian economy." - 82 - the Structural Adjustment Mission that an Initiating Memorandum should be prepared in order to develop a Bank-wide consensus on Tanzania. 125 7.41 By the end of January 1983 the Bank noted that the Tanzanians had taken a number of significant steps and identified others included in the program which remained to be taken.126 Discussions with the Government were resumed shortly after the January memo, and by the end of March there were other, fruitful, meetings on the Bank's draft Economic Memorandum and Agricultural Sector Report. On the basis of these discussions the Bank concluded that "there have been encouraging signs of the Government's in- tention to work with us on a policy framework". It was also noted that 'the Government made a serious and thorough review of tie recommendations in our Agricultural Sector Report and adopted most of them in their own subsequent report". This was probably due in no small part to the setting up of an Advisory Group under the auspices of the Third Technical Assis- tance Project in 1982.127 7.42 Dialogue between the Bank and Tanzania continued to revolve around progress in carrying out the adjustment program, with the Bank welcoming Government's policy actions and stressing the importance of access to Fund lending and Tanzania expressing concern over the delay in financial inflow occasioned by the linkage between the Bank and the Funa. It was at this stage in the interchanges on structural adjustment in July 1983 that the Bank came to recognize two facts that came to influence the course of fu- ture Bank involvement Tanzania's efforts to design a suitable adjustment program. First, while discussions between Tanzania and the Fund had not led to an agreement so far, there was a noticeable change in the attitude of the Government in that they considered both the advice and the financial support of the Fund and the Bank as absolutely necessary for a successful economic recovery program.128 Second was that Tanzania urgently needed technical assistance to prepare the material requested by the IMF and the Bank, and for presentation to the Consultative Group. The Programs Division proposed that in the process of preparing the upcoming CER the mission would work with the Government to design a feasible medium-term recovery program which would have as its basis the SAP being implemented by 125/ Memo to files dated Dec. 15, 1982: "Tanzania - Review of Structural Adjustment Mission". 126/ Memo dated Jan. 17, 1983 - RVP to SVPOP: 'Tanzania - Recent Developments and Future Lending". 127/ See Vol. II, Chapter on Agriculture para. 2.47. 128/ Memo dated July 29, 1983 from Director, EA1 to SVPOP: "Tanzania - Recent Developments and Next Steps'. - 83 - the Government.129 This proposal was reflected in the Bank's statement of Country objectives two months later...130 7.43 It is not clear whether and to what extent the more cooperative attitude of the Tanzanian Government was in response to a hardening of senior management's attitude. The attitude of the Bank's senior management around the middle of 1983 appears to have become less sympathetic to Tanza- nia than that of Bank staff. Senior management leaned toward using the lending program as leverage to get Tanzania to make faster progress on an effective economic adjustment program. It was decided that no further projects should be processed for Tanzania until progress was significant. This resulted in the delay of two projects already appraisad. Prospective co-financiers of the Ports project at a meeting in Paris were informed that further participation and eventual financing of this project by IDA would depend on improvement in the macroeconomic situation in Tanzania. The Tanzanian delegation to the Annual Meetings in September 1983 seemed to have been of the view that the Bank's action had been taken because they had failed to reach an agreement with the Fund; and in a meeting with the Bank argued that it was important for the Bank not to tie structural ad- justment lending or an export promotion credit to the IMF negotiations. 7.44 The tone of Bank/Tanzania discussions on structural adjustment improved quickly after the less than pleasant meeting in September. Bank President Clausen, in reply to an earlier letter from President Nyerere requesting clarification of certain aspects of Bank policy on SAL including linkage with the IMF, said that the Bank was encouraged by the measures Tanzania had taken, then went on to outline additional measures needed and to justify linkage with the IMF.13'1 This approach was also taken by staff of an economic mission in an aide-memoire left with the Government. The aide-memoire went on to outline a damage minimization program involving further efforts to halt the decline in GDP growth. The mission provided estimates of foreign exchange requirements for industrial rehabilitation, and urged the systematization of procedures for monitoring aid flows and controlling the level and terms of new borrowing. It said technical assis- tance could be provided by the Bank for setting up a debt recording system. The conclusion of the aide-memoire contributed to the softer tone by ex- plaining that it had been written in the hope of promoting a constructive dialogue and would welcome any corrections or additional information.132 1291 Memo dated July 18, 1983t "Tanzania: CEM Issues Paper. 130/ Memo to Distribution dated Sept. 28, 1983, from Chief, EAlDA: 'Country Objectives for Kenya, Tanzania and Uganda". 1311 Letter dated Oct. 6, 1983 1321 Aide-Memoire dated Oct. 19, 1983. - 84 - 7.45 In the budget presented to Parliament in June 1984 the Government announced many important measures to improve incentives to production and to export, including a 26Z devaluation and increases in producer prices; which were to form the core of its Economic Recovery Program (ERC). The renewed demonstration of willingness to make policy adjustments was met by a more positive attitude within the Bank and a decision to provide assis- tance in meeting the information needs Zor the negotiations with the Fund. 7.46 The important breakthrough in the discussions came in July 1985 when the Bank proposed "two scenarios", the low involving gradual changes in macro-policy over an extended adjustment period and a high entailing more drastic changes of the kind suggested by the IMF, and expressed will- ingness to support either of these scenarios. Lending level would be high- er and the Bank would play a more active role in mobilizing other support should the Government opt for the high one. The GOT said it was willing to take the measures implied by the high scenario provided that the required external assistance could be reasonably assured, and requested Bank help in preparation of the program, beginning with an outline of the Bank's view of the minimum macro-economic policy measures necessary to trigger Bank en- dorsement and program credit.133 7.47 By the beginning of 1986 the Tanzanian economic situation wor- sened. The impression gained by a December 1985 Bank mission was that events were slipping beyond the control of the authorities. The mission which had gone to continue the policy dialogue avoided specifying a target exchange rate but conveyed the Bank's preference for an interest rate structure that was positive in real terms. Principal concern on the other side was to explore with the Bank team how the Program Credit could be used to cushion the impact of the exchange rate adjustment on consumer prices. Being satisfied with the latest modifications in the draft program the Bank expressed its willingness to send an appri.isal team subject to Fund en- dorsement of the Government's stabilization policies. 7.48 In March Tanzania formally applied for a program credit and dis- cussions turned to the preparations for convening a meeting of the Consul- tative Group. Bank enthusiasm was reflected in a July memo: " It is worth recalling that the 1986-87 Budget measures represent a milestone in their pragmatism, in their recognition of the need to significantly change the course of economic management, and in their consolidation of the steps taken in 1984-85. The process, although fragile, is become more and more explicit....Only through a judicious mixture of support and pressure will we contribute to make the process irreversible and to preserve its dynam- ics". Since 1986 the dialogue has largely centered on the undertakings in connection with the Multi-Sector Rehabilitation Credit approved in November of that year. 133/ Office Memo dated Sept. 3, 1985: "Tanzania - Economic Mission: Issues Paper". - 85 - Issues Not Discussed Population Growth 7.49 In Tanzania the Bank seems to have avoided the discussion of deli- cate issues--those on which the country did not wish to commit itself and those on which it had taken an ideological position, even where these had or were likely to have a profound developmental impact. Por example, the Bank had no meaningful discussion on population growth, although Tanzania more than doubled its population during the last twenty years when the Bank was expressing concern about the constraint of population growth on econom- ic performance and well-being particularly in Sub-Saharan Africa.134 7.50 Although Tanzania avoided making a formal statement of its popula- tion policy, records show that Tanzania was not unwilling to discuss this topic. Discussion within the Bank in 1978 of a possible population project in Tanzania led to a suggestion that a mission should be sent there to discuss population policy and identify ways the Bank might support the Government's activities in this area. At a meeting with the Principal Secretary of Finance the Bank was told that although this was a sensitive area, the Treasury was willing to discuss it, but, with the attractiveness to bilaterals of investments acceptable to the Government, it was unlikely that Tanzania would consider using Bank financing for this purpose. The President of Tanzania in a letter to World Bank President in 1983 said he agreed with his view on the link between high fertility rates and poverty in Sub-Saharan Africa.135 In an OED mission's interview with a close advisor to President Nyerere it was revealed that although the official position for a long time was that Tanzania did not have a population problem and the Party has resisted any articulation of an official population policy, the Government has been giving quiet support to family planning activities of the United Nations Fund for Population Activities supported UMATI (the Tanzanian Family Planning Association), and has been involved in a low keyed dialogue with the UNDP on these matters. 7.51 Recently there have been signs of a re-evaluation by the Party of its stance on the population issue and a 1986 conference by its National Executive Committee was devoted to it. It was also suggested that if more international institutions, including the World Bank had voiced concern, done studies and presented their findings on population dynamics and its implications, the change in Party attitude may have come sooner. It is not clear whether the Bank avoided the topic in order to make its dialogue with the country easier, or whether it was dissuaded from investing time and expertise in a dialogue that did not hold any prospect for a lending opera- tion in the forseeable future. Whatever the reason, it remains one area in 1341 Memo dated March 16, 1979: Tanzania Strategy Meeting; OThe recent census in Tanzania...population is now estimated at above 17 million implying a growth rate of just below 3Z. To date, we have not done a comprehensive analysis of the issues in this sector." Comment still not done. 1351 Letter dated May 25, 1983 from President Nyerere to President Clausen. - 86 - which the Bank did not live up to the expectation held in Tanzania that the world's premier development institution ought to give its best technical opinion on relevant developmental issues even at the risk of being un- popular. 7.52 This contains some important lessons for the Bank in the conduct of its dialogue on sensitive issues. Firstly, it must face the dilemma of whether to accept a stated policy, however much it disagrees with it, and try to work within it , or risk disfavor by giving an opinion which runs counter to policy. Secondly, the experience of the UNDP is that a dialogue can be usefully conducted in a quiet non-confrontational manner. Thirdly, the decision whether or not to include a subject in discussions should turn on its importance to the country's development and not on whether a lending operation is in the offing. Fourthly, the development of an adequate in- formation base is essential to any discussion of sensitive issues. The Bank simply cannot afford to let the discussion founder on disagreements over the basic data. The Bank was not prepared for a discussion of popula- tion issues. The 1978 Health Sector Report which had been expected to provide the data and analysis for a dialogue essentially igvored the topic, and of all the economic memoranda of the last twenty years only the 1984 managed to devote a page to it. Finally, spatial distribution of popula- tion has been and will continue to be important in Tanzania. Implications of Ideology for Development 7.53 The implications of ideology for development is another important area ignored in the Bank/Country dialogue. This was especially noteworthy in the first ten years after the Arusha Declaration in 1967. Aside from seeking assurances that appropriate compensation would be paid for nation- alized property the Bank paid little or no attention to the need to under- stand the operational policy content of the general goal of building so- cialism. Not surprisingly, the Bank was unaware of the content and impli- cations of such measures as decentralizatioa of government administration and to a lesser extent the %jamaa, villagization program. The attitude of reticence to discuss has been recognized in the Bank. A 1981 r1mo on Coun- try Economic and Sector work had this to say: "In a country such as Tanza- nia, where ideological considerations play a major role in decision-making and sensitivities and suspicions persist regarding the role of external and technical assistance, the extent to which basic development strategy issues can readily be discussed is limited. (Opportunities to raise strategy issues with the Party, which plays an increasingly dominant role in deci- sion-making, are almost non-existent.)" 7.54 There is continuing need for exchange of views on Tanzania's de- velopment prospects with the Party, especially now that the head of the Party is not the President of the country. This cannot be approached in a negotiating mode nor can it be linked to lending; but should be pursued through a low key, honest interchange to widen Bank understanding of why - 87 - certain things happen the way they do, and why certain measures are more or less feasible than others or require more or less political preparation. This dialogue is necessary to help the Bank design its operations to cor- rect a tendency to focus on efficiency criteria without effectively taking into account the importance Tanzania attaches to distributional and nation- al development considerations. It could also provide opportunity for the Bank to dispel the mistaken notion that the institution is unsympathetic to the country simply because of the political path it has chosen. Management of the Dialogue 7.55 The effectiveness of Bank/ Country dialogue is difficult to evalu- ate, since the link between advice from one of many sources and a particu- lar policy decision cannot be established with a high level of certainty. However it is possible to judge the potential effectiveness of advice by looking at the way in which the dialogue is approached and the manner in which advice is given. This judgement could be based on an examination of the main issues thrown up by the review of the main topics to see how well the Bank performed with respect to each. This in the approach adopted here. 7.56 The issues involved in the Bank's approach to the diRlogue are (i) initiative, (ii) differences among advisors, (iii) clarity of objectives, (iv) the actual conduct of interchanges. Those involved in the manner in which advice is given are (i) attitudes, (ii) credibility, and (iii) real- ism. Approach to the Dialogue Initiative 7.57 From the foregoing review of the leading topics in Bank/Tanzania discussions it is clear that while the Bank took the initiative to start and/or to continue a dialogue on Nationalization and Structural Adjustm=2t, the same cannot be said for its participation in the exchange of views on Villagization and Decentralization. On the topic of Public Investment Planning and the Crisis beginning with oil in 1974 it is fairly clear that Tanzania took the initiative by asking repeatedly for Bank advice and tech- nical assistance. The issue suggested by this observation concerns whether and under what circumstances the Bank should take the initiative in start- ing or continuing discussions on the country's development and national economic management policies. On the answer to the implied question will depend how the Bank performance is to be judged. 7.58 In the foregoing review it was tacitly assumed that the Bank would base its decision to take the initiative in exchanging views on whether or not the matter is likely to be important to the client's development, and on whether the Bank can make a contribution to the debate. This assumption - 88 - was based on the fact that the Bank has considerable knowledge of develop- ment issues derived from its wide experience in many countries, from its economic and sector work, and from its contacts with bilateral and multi- lateral sources of technical and financial assistance. However this knowl- edge was of limited advantage in Tanzania because the country was attempt- ing to follow a socialist path with which the Bank had no experience. In addition, many of the problems impeding development since the mid-seventies were adjustment and stabilization problems requiring crisis management expertise which had never been part of the experience of the Bank. So that it is understandable that on these criteria the Bank would not iave taken the initiative in discussions of the more socialist aspects of the develop- ment strategy. 7.59 At the same time an institution providing development advice mair.- ly in the basis of its accumulated experience should also be willing to engage in a discussion in order to learn from the country's experience, and if a discussion is the most effective way of learning. The novelty of the Tanzanian development strategy should have made it a prime object of Bank intellectual interest and of Bank/Tanzania dialogue. There is evidence that the Bank was particularly curious about Tanzania's approach to rural poverty. It is therefore difficult to understand why some other important elements of strategy were so inadequately considered. 7.60 one possible reason for the lack of initiative on the part of the Bank is that the perception it had of its role in development even into the late seventies was limited by the emphasis given to financing projects in the charter. The importance of the policy environment in determining the effectiveness of the Bank in project financing was only gradually appreci- ated. Only gradually has the role of the Bank been adjusted to give a position of importance to policy advice. Indeed although the Bank started the discussions on sLructural adjustment, the Bank was reluctant to be identified as the source for advice on specific measures. This probably indicates that the issue of initiative is still not settled, or that the Bank interpretation of dialogue is tied to the concept of negotiation rath- er than the broader idea of exploration of alternatives. Objectives and Strategy of the Dialogue 7.61 In reviewing the discussions on structural adjus&ment in the early eighties one gets the impression that the Bank was not clear at each en- counter whether its objective was to get from the Tanzanians a package of measures to which both sides could agree, or whether it was to inform the decisions which Tanzania had to make. It was therefore not clear whether the Bank should conduct the discussions in a negotiating mode or in an advisory mode. In the negotiating mode the Bank should have been prepared not only to provide information regarding the policy options, but should have been been prepared to say what it would do in support of alternative policy packages. This was finally done in July 1985 when the three scenar- ios were presentod. The principal defect in the negotiations in the early eighties wap the failure of the Bank to define and put before the Tanzani- ans the options--combinations of policy packages and linked Bank support, leaving them ignorant of what were the minimum measures needed to trigger Bank support.136 Since the Tanzanians plainly lacked adequate technical expertise to develop the alternative policy packages for the required adjustment the Bank should have been in an advisory mode. But the Bank had not done the economic and sector work to provide a basis for this advice before openitag the dialogue on structural adjustment in 1980. 7.62 Not having done the necessary technical work to underpin its ad- vice the Bank s ould have suggested a joint exploration of the options. This exploration could have benefitted from the involvement of the local intellectual community. This would have meant not just talking with them occasionally but sharing with them the relevant data and analytical appa- ratus including forecasting models. (To date this has not been done effec- tively, and local economists in the university still complain that the Bank model is kept a mystery to them.) The foru:tion of the TAG in 1981 was a move in the direction of ex-loring the options. However, it was left un- clear whether the TAG should simply advise or should attempt to onegotiatem an economic adjustment package with the political directorate, and they tried to do the latter. But not being in a position to link the options with levels of support, the TAG was unable to get agreement to a set of measures satisfactory to the Bank; with the result that the Bank was to varying degree disappointed with the outcome and the members of the team were unhappy with the Bank's lack of appreciation for the problems involved in getting various factions on the political side to agree to a set of measures. 7.63 The conclusion to which one comes is that the Bank did not act as if it knew whether it wanted to negotiate or to advise. Part of the expla- nation for this lack of clarity in objectives lies in the fact that when it was obvious that the Tanzanians did not wish to go all the way to a SAL the Bank offered them the Export Rehabilitation Credit, to which it attempted to attach much of the conditionality it would have tied to a SAL. After negotiating this Credit the Bank continued to behave as if it was involved in negotiating a SAL. It was not until mid 1983 that the Bank appeared finally to understand that Tanzania was lacking in the capacity to under- take policy reform, and that conducting the dialogue in a negotiating mode was definitely premature. 136/ Letter dated September 24, 1981, Michanek (leader of TAG) to Sandberg, East Asia Region World Bank; Attachment--Draft Work Programme, "One of the major frustrations that the Tanzania Government has had in its dealings with the World Bank is the absence of clear guidance from the Bank of what it would wish in an application for a structural adjustment loan.' Different Advice from Different Advisors 7.64 With so many different institutions, agencies and persons advising Tanzania it was inevitable that conflicts between prescriptions would occur from time to time. In planning the strategy for dialogue the Bank should have paid attention to the existence of differences among experts, both within the Bank and outside it. Arrangements should have been in place to resolve differences, counteract advice, or adjust Bank presentations to minimize conflict. The main purpose of such arrangements would be to mini- mize the confusion which the client would have felt when confronted with conflicting technical opinion, the cogency of which it lacked the capacity to test. In the absence of this capacity Tanzania frequently leaned to advice on the basis of its perception of how sympathetic a source was to its ideology. Some observers believe that over the years Tanzania per- ceived the Bank and Fund as constituting one pole of advice and the ILO, FAO and leftist radical economists as comprising another, more sympathetic pole.137 7.65 The Bank failed to develop an effective way of dealing with the ILO idvice . p'ice policy which during the early eighties conflicted with that of the Bank and Fund. Thus in 1982 the Bank was saying 'while it is possible that the increased availability of inputs and consumer goods, rehabilitation of the transport fleet, prompt payment to farmers, improved storage and processing, etc., could lead to a sustainable increase in sup- ply without an increase in prices, this does not appear likely". The ILO was adviing "The major effort to raise agricultural production should be on other fro t: to increase inputs, transport, improve payments, continue good availability and so on. The price policy is of rather minor signifi- cance.0138 The ILO advice seemed carefully presented to rebuff the main types of arguments presented by the Bank to justify increasing agricultural prices in order to raise production. The ILO point of view was shared by some Bank staff, including the RMEA in Nairobi which after substantial research in the field came to the same conclusion. Meanwhile, an internal Bank memo suggested that "Bank staff have no firm analytical framework for determining required price increases for each crop'.139 There is no record of any attempt to coordinate advice on this matter with the ILO. 1371 See Paul Collier, "Aid and Economic Performance in Tanzania, Op. Cit. 138/ ILO: 'Basic Needs in Danger', Op. Cit., Chap. 3 on Short Term Adjustment Measures. M 139/ Memo. dated Oct. 28, 1981; Sr. Econ. EA1DR to Director, EAN: Tanzania -Basic Needs Mission; 'It appears that the controversy between the 1977 BER and the 1978 ILO Report continues.' Memo. dated July 5, 1983; Sr. Econ. EA1DA to Chief EA1DA suggests Bank aware of considerable weakness in the data base - "in absence of farm budget surveys and data on cross supply elasticities, Bank staff have no analytical base for determining required price increases for each crop." 7.66 Bank handling of conflicts with the Fund was much better than with the ILO; not that it was always good but it improved over time. In 1976, the Bank disagreed with the Fund's views on the need for further balance of payments support for Tanzania.140 Instead of trying to reach a compromise with the Fund, the Bank went ahead with a program loan and urged Tanzania to liberalize imports and foreign exchange controls in the absence of a Fund Standby with measures to defend the reserves. The ensuing hemorrhage of reserves marked the beginning of a foreign exchange crisis that has lasted a decade. Since 1980 the Bank has been more willing to engage the Fund in discussion of macroeconomic issues formerly considered in the Fund's domain, e.g. exchange rate; and has firmly linked policy-based lend- ing to an IF/Tanzania agreement. In a 1982 memo to the Fund, Bank staff said 'our information on the deficits of the export crop parastatals do not indicate a need for a 50X devaluation to eliminate the deficits of these parastatals at the 1982 procurement prices....We also do not feel 55 Sh to a dollar black market rate in probably a very narrow market gives any reli- able perspective on the price distortion'.141 Another memo in 1984 stated, "In general, I believe we have felt, more strongly than you, that Tanzania has done much of what needs to be done for a satisfactory program, short of devaluation. We think you might give the Government more credit for recent policy changes than is now done in the briefing paper...as indicated previously, we believe that the producers of export crops are adequately being remunerated at present prices and exchange rate'.142 In 1985 the Bank had this to say about the proposed IMF Program's adjustment period--"Our feeling is that the three year adjustment scenario contemplated in the IMF proposal is not realistic. The severe econom4c problems facing Tanzania are largely structural in nature, not financial." This close and continuous dialogue between Bank and Fund played an important part in facilitating agreement between Tanzania and the Fund and in enhancing Bank credibility in its relations with Tanzania. 7.67 There is evidence that differences within the Bank were not promptly resolved and as a result conflicting advice was given to the cli- ent. In the early seventies there were important differences between the r 140/ Memo dated Dec 28, 1976 from RVP to SVP: "Tanzania : Proposed FY77 Program Credit', states, '...IMF did not engage in an independent and more realistic projection of the BOP". 141/ Memo to files dated Nov. 15, 1982: Tanzania - Minutes of Nov. 9, 1982 Meeting with the IMF. 142/ Memo dated Jan. 4, 1984 from Dir. EA1 to IMF Dir. African Dept., TANZANIA - Briefing Paper for Tanzania. Regional Mission to East Africa and Headquarters staff which were not settled in discussion, and which resulted in confusing signals to the Tan- zanians.143 Also, toward the end of the seventies and in the early eighties there were differences between the Programs Division and the Agricultural Projects Division which were for too long not settled in debate, Programs essentially ignoring or overriding Projects.144 Eventually, the Bank's position was changed to reflect the inputs from Projects, but the impact on the dialogue was to introduce an element of shock which could have been avoided; as it resulted in the decision that the Mara Regional Development Project which had been negotiated would not be presented to the Board.145 7.68 In planning the strategy for dialogue conflicting pointc of view within the Bank must be harmonized so that as much as possible the Bank will speak with one voice and be reasonably consistent over time, without any pretense at infallibility or giving an impression of inflexibility. This requires that differences should be discussed and a position on the issue formulated. It also means that agreed positions should be monitored and reviewed and the reasons for changes made clear to participants in the dialogue. Conducting the Discussions 7.69 The conduct of the dialogue with Tanzania has not been carefully planned. On occasions the wrong subjects were raised at the wrong level by the wrong persons, e.g., the discussion of overdue service payments with the President of Tanzania by someone other than the President of the Bank. There has been a noticeable tendency to discuss every aspect of Bank/coun- try relationship in single meetings, especially those at high level, rather than focus on groups of issues. Another important shortcoming in planning the conduct of the dialogue was the lack of coordination, which evoked Tanzanian complaints that "too many missions come asking the same ques- tions, and for data already in the Bank" and that "sometimes the purpose of their visit is unclear to us". One of the most elementary aspects of plan- ning for the dialogue is the preparation of the basic information and argu- ments. Tanzanian officials comment on this by making comparison with the Fund. "Bank missions appear less technically prepared than Fund missions'.146 This may be due to the fact that the development problem with which the Bank deals is multi-faceted and complicated, and not amenable to precooked remedies. This makes it important for Bank spokesmen to know and to com- municate to the other side whether they are seeking information, exploring options, advising, or negotiating. 143/ Letter dated Nov. 3, 1972 from RMEA to IBRD. 144/ Memo dated Feb. 5, 1981 in Project Files See also Vol. II Chap on Agriculture, para. 2.31 145/ Memo dated June 9, 1981: "Tanzania - Proposed Mara Rural Development Project. 146/ Comments made to an OED mission to Tanzania in Nov/Dec 1987. H - 93- 7.70 The discussion of overdue service payments after the suspension of disbursements on June 15, 1982 is an outstanding example of how not to conduct a dialogue. In this interchange the Bank was at pains to point out that despi4e the suspension it had tried to maintain operations on as nor- mal a basis as possible and had made certain exemptions to minimize the adverse effects on the projects being implemented; while Tanzania under- scored its intention to settle as soon as it was able. The peculiar fea- ture of these communications was that they were conducted simultaneously at many levels and in many ways, involving President to President letters, missions by management and staff, and representations by the Resident Mis- sion. Tanzanian response to this veritable barrage was to ask for Bank technical assistance to prepare for a rescheduling of its external debt. After four months Tanzania brought its payments up to date, but not before registering annoyance at the manner in which the matter had been handled. Carryine on the Dialogue Attitudes 7.71 Many Tanzanian high level officials commented unfavorably about the attitude of many Bank staff conveying the suggestion of infallibility of the Bank's policy prescriptions. The basic case for humility derives from the fact that in development matters *even when all the experts are agreed they may still be wrong." In the particular case of Tanzania the Bank has been associated with enough errors that an air of infallibility is simply out of place.147 The hallmark of humility is the willingness to listen. In addition to the fact that 'Tanzanians want their point of view to be given respectful consideration", Bank staff can learn a lot about what to do and what not to do by listening intelligently to their clients. The Bank was not always prepared or willing to discuss matters which it had reason to expect would have been uppermost in the minds of Tanzanian spokesmen at various times; e.g., the immediate foreign exchange crisis.148 147/ Tanzanians readily refer to the Bank's pressure to liberalize imports in 1977 without advising on adequate safeguards against depletion of reserves. They also mention projects like cashewnut processing, the Morogoro Shoe Factory and Textile Mill. 148/ This was raised by almost every Tanzanian Mission to Washington between 1981 and 1985. Records show little useful comment by the Bank and reveal an anxiety to get on to other issues. See also: Letter dated Sept 25, 1985 from Minister of State, President's Office to President, World Bank stating, inter alia, OIt is difficult to avoid observing that in the wake of the body-blows in the form of oil shocks and adverse terms of trade received by the least developed countries, the Bank's management personnel at the high policy levels assisting the President has not reflected an adequate understanding of the realities of options facing economic managers of the least developed countries." 94 By not affording the Tanzanians the courtesy of being always willing to listen, the Bank may have compromised its own freedom to raise some issues, which though important, were not uppermost in the minds of the other side at the time, e.g., population growth. Credibility 7.72 The Bank must at all times maintain its credibility in the dia- logue with clients. There must be no doubt regarding the motives for the positions it takes or advises. Part of Tanzania's reluctance to take mea- sures in the early eighties may have stemmed from the belief that stiffer conditionality for Bank lending was due more to the shortage of IDA funds than to real requirements for economic adjustment. Some Bank staff recall that the posture in the Region was to find some basis for rationing scarce IDA funds; and now think that the Bank may not have been frank enough with the Tanzanians. Some staff justify the Bank's *waffling' as necessary to avoid the differences with the Fund leading to an open, public rift with a sister Bretton Woods institution. Bank records show other evidence of lack of forthrightness in communications, e.g., a back-to-office memo in 1983 stated *the success of the mission was mixed because of two problems which ultimately proved insurmountable: (i) the failure of the Government to organize a naticnal working group on external debt issues before the mis- sion's arrival, and (ii) the steadfast refusal of the Governor of the Cen- tral Bank (Bank of Tanzania) to release any information" and "Despite lack of cooperation by the Bank of Tanzania, a great deal was learned". Yet in an Aide Memoire (ostensibly left with the Government) the writer stated Othe mission appreciated very much the cooperation of the Ministry of Fi- nance, the Bank of Tanzania and the National Bank of Commerce in providing information considered basic to the mission's effectiveness".149 7.73 Perhaps the most significant issue about which there was prolonged lack of forthrightness by the Bank was the matter of linkage of Bank non- project lending with an agreement with the Fund. A November 11, 1976 Memo dealing with Mr. McNamara's meeting with Minister of Finance of Tanzania stated 'Mr McNamara emphasized that it would be impossible to proceed with the program credit until agreement with the IMF had been reached on the basis of which further Fund resources could be utilized'. Yet, in 1977 the Prcgram Credit was granted in absence of such agreement between Tanzania and the Fund. In September 1978 in a meeting between the Bank's President and Tanzania's Principal Secretary of Finance, the Bank's position was - stated to be that although a program loan was not contingent upon meeting the Fund's requirement in every detail, it was essential that a firm pro- gram dealing with both long- rnd short-term problems be worked out. Yet a 149/ Back to office Memo dated April 26, 1983: *Tanzania - Report on External Debt Mission.' 95 Bank mission to Tanzania in August 1979 explained that for a program loan to be processed expeditiously, the Government would have to reach agreement with the IMF.150 The Annual Meeting Brief in 1981 stated that 'we also hope to be able to provide further non-project assistance during the year, pro- vided that there is sustained progress against the objectives of the Memorandum of Understanding (including access to IMF facilities).' Presi- dent Clausen in a meeting with the Tanzania Minister of Finance did not clarify the position regarding agreement between Tanzania and the IMF when he said "Agreement with the IMF...in particular it would help the Bank Group to be of assistance.' But in a meeting with President Nyerere in December 1981, Mr. Clausen stated unambiguously that an agreement with the IMF for the provision of short-term finance was a precondition for any longer term structural adjustment program that could be given Bank support. As late as 1985 the Bank was still waffling on the issue of linkage; as seen in an August memo: 'The operative condition is that the Bank needs to be satisfied that Tanzania is implementing a comprehensive set of macro- economic adjustment policies (including the kind being discussed with the IMF but not uecessarily resulting in formal agreement with the IMF on Standby)." The fact was that since the Bank considered IMF resources necessary to the financing of adjustment, it did not agree to the MRC until after Tanzania had reached agreement with the Fund. It just could be that if this linkage had been made clearer to the Tanzanians, agreement with the Fund might have come sooner and the adjustment started earlier. Realism 7.74 Being realistic in a dialogue entails knowing and bearing in mind what is feasible within the conetraints on policy reform capability. These constraints in the Tanzanian situation derived partly from the political commitment to a strongly ideological approach to development on the part of the Party and the role of the Party in relation to the Government, and partly from the shortage of expertise. This would have been particularly important when the discussion was in a negotiating mode. From the point of view of thz Bank/Country dialogue the unsatisfactory aspect is that a cli- ent may be pressed into making unrealistic promises in order to get the money. This seems to have been the case with negotiations leading to the Export Rehabilitation Credit in 1981.151 Needless to say Tanzania was unable to meet the conditions. 7.75 One clear weakness of the Bank was its tendency to focus narrowly on economic aspects of development and too superficially on the political and cultural aspects. In a newly independent country like Tanzania the political and social aspect cannot be regarded as environmental 'givens" in the analysis of economic prospects. They are intimately connected with the 150/ Program Completion Report: Tanzania Export Rehabilitation Program, Credit 1133-TA, December 15, 1986, para. 2.03 151/ Letter dated Nov. 11, 1981 from the Bank to PS Finance shows the large number of actions required of Tanzania during a short period. - 96 - evolving arrangements for control and management of the economy. The Bank was slow in appreciating how pervasive an influence on policy is exerted by the Party, the political organ of control and direction, and in developing the expertise for a dialogue in that context. At the same time the Bank did not always bear in mind the strengths and weaknesses on the Tanzanian side. This led to unrealistic assumptions and expectations regarding the level of understanding of the policy issues and the ability to design and administer measures. 7.76 Being realistic means being sensitive to other concerns than the narrowly economic but which can affect the acceptability of policy advice. Sensitivity to non-economic considerations is warranted both by the need to be realistic and the need to give economic advice a human face, but is also important on technical grounds since such considerations constitute the environment for economic processes and affect economic outcomes. This sensitivity is intimately linked to the willingness to listen, and is rele- vant because much of the dialogue is with politicians who have responsibil- ity for maxinizing a social welfare function characterized by many dimen- sions of which the economic is only one.152 Link between Dialogue and Lending - The Issue of Leverage 7.77 In addition to the issues of planning and execution which have been raised above, it is necessary to give some consideration to the link between policy dialogue and lending. While the link is necessary in order to ensure that the policy environment complements lending, the use of lend- ing as a source of leverage in policy discussion could be counter-produc- tive. The Bank should aim to foster a keen understanding of the issues by Tanzania's decision-makers as a means to getting decisions agreeing with its preferred position, rather than depend on the leverage it may be able to exercise by the threat of withholding financing or holding other opera- tions hostage. The use of leverage in 1981 (Mara RIDEP withheld after negotiation) and 1983 (lending program effectively suspended for FY84) was confusing to the Tanzanians and generated considerable uncertainty regard- ing the Bank's intentions.153 7.78 The blend of pressure and persuasion is not without merit in nego- tiation, but when the sanction is not obviously related to the point in 152/ Memo: Tanzania CPP Strategy Memorandum, January 1974; "Our understanding of Tanzania's political system, its social dynamics and motivation problems is inadequate at this point to recommend a specific course of action." 153/ The approach surfaced in 1981 but as early as 1974 the Bank was thinking about using lending as leverage over policy. Memo: March 14, 1974, "...could a considerably larger program, suitably concentrated geographically or sectorally, give us decisive influence over some areas of development where our ideas are better than those that guide the Government generally?" [Emphasis mine] contention the likelihood is that the client may see other factors as un- derlying Bank action. How much leverage shruld be sought by the Bank should be tempered by reference to the appropriate time horizon for Bank/Country relations, and in general this would be very long compared for instance with the Fund. Thus while the Fund, being concerned with short term stabilization, probably should wish to maximize pressure to get imme- diate up-front policy action, the Bank need not behave in a similar all or nothing fashion. It can and in fact does agree to commit difficult issues to further study, appropriately tranching the lending, while getting the country to start the adjustment with measures which it finds easier to take immediately. This is the approach taken under the Multi-Sector Rehabilita- tion Credit approved in 1986. But given the long term horizon the decision to hold lending for infrastructure hostage until the adjustment measures are all agreed is difficult to justify, especially in light of differences in gestation lags. 7.79 The issue of leverage is intimately bound up with the question of whether macro-conditinality (the main source of difference in the dialogue with Tanzania, specifically devaluation) should be imposed on project based lending. This question is an important matter of Bank policy and should not be decided in an ad hoc manner without full Board discussion, which nearly happened in the Tanzanian case in 1983. Besides the issue of the amount and nature of the leverage to be obtained by linking lending and dialogue, the matter of timing would also have to be considered. In the case of Tanzania in 1983 maximum leverage was being sought by holding the lending program hostage just at the time when Bank missions were reporting excellent cooperation and strong policy measures being planned by the Gov- ernment. The interpretation on the other side was that the program was being held hostage to give the Fund greater leverage in its dialogue with the country. The obvious lesson for the Bank must be that the linkage of lending to dialogue for the purpose of leverage ought to be approached with caution. Other Lessons 7.80 Perhaps the most important lesson for the Bank from the experience in its dialogue with Tanzania is the need to adjust its view as to the the role and purpose of the policy discussions and henQe its expectations re- garding them. This has been recognized by some staff for a long time. A 1978 paper by the Bank Resident Representative assessing how effective the Bank was in exercising policy influence in Tanzania showed an admirable understanding of what the attitude of the Bank should be. "It is not only difficult but presumptuous to attribute particular Tanzanian policy actions solely or even partially to Bank influence. The need for reform and change and the design of specific actions evolves as part of a continuous develop- ment and is often mirrored in the advice of the Government's own civil servants and advisers as well as dictated by external events,". - 98 - 7.81 The Bank seems to have taken advantage of external events espe- cially those causing economic crisis to raise policy issues and influence some decisions. The timing of such discussion is questionable. While a country in crisis may be more willing to discuss policy changes, the ten- dency is to focus more on palliatives and ways of getting out of the crisis rather than on fundamental change in long-term development strategy. Typi- cally, the country is experiencing a balance of payments problem reflected in a shortage of foreign exchange. A dialogue which does not address this issue may not command enough attention. The problem is that the Bank is not primarily a source of balance of payments support, and tends not to have much to say on the short-term response to crises. Hence the debate with the client tends to be unjoined and at cross purposes as happened with Tanzania in 1981. Clearly, in a crisis situation the dialogue must include the Fund, which is better placed to deal with the issue of short-term in- jection of foreign excl"ange. 7.82 What is needed is a broader, more continuous approach to the pol- icy dialogue in order to set a discussion of crisis management within the framework of a more general discussion of Tanzania's development. One can hardly over-emphasize the educational benefit to Tanzanian civil servants, other advisers, and Bank staff, of a free non-confrontational interchange of ideas. This situation was being approached in 1977 when the Basic Eco- nomic Report on Tanzania was reviewed. 'Virtually all senior Government economic and financial managers and advisers actively participated in the discussions. Several major policy problem areas were identified and are being actively followed up." The report was in the nature of a comprehen- sive stock-taking exercise. This should be done at least once a decade, or when it is felt that the country is at an important crossroad in its devel- opment, to provide the factual basis for regular renewals of the broad dialogue. Through a broad non-confrontational interchange the Bank can help to educate and inform the citizenry on policy options. This can also be informative to interest groups, providing a clearer view of the issues of particular interest and aiding the development of a focus around which domestic pressure on policy makers may coalesce. In Tanzania, vocal pri- vate operators helped to bring about the de-licensing in truck transport, and could no doubt be a factor for change in other areas of policy. - 99 - VIII. THE LENDING PROGRAM Evolution 1. Size 8.01 During the period 1963-1988 the World Bank (IBRD and IDA) made loans and credits directly to Tanzania amounting to US$1,498.7 million. In addition about US$37 million, equal to one-third of commitments to the East African Community jointly guaranteed by Kenya, Tanzania and Uganda, may be regarded as lending to Tanzania. The average annual level of lending (com- mitments) varied over four sub-periods or phases in Bank/Tanzania rela- tions; from US$18 million in 1963-1973 to US$100 million in 1974-1979 down to US$67 million in 1980-1985 and back up to US$105 million in 1986-1987. (See Table 9.1). 8.02 Disbursements amounted to US$921.6 million, to which should be added about US$29 million in respect of Tanzania's share of disbursements to the EAC. Based on data for 1970-1986 average disbursements rose from US$14 million in 1970-1974 to US$59 million in 1975-1980 continuing up to US$84 million in 1981-1986. These average annual levels of disbursement were equivalent to 0.7, 1.5, and 1.5 percent respectively the average of Gross National Product during each period. They resulted in substantial net transfers except for one year--1985. (See Table 9.2). 8.03 Comparison with average commitments and disbursements for the group of twenty-eight countries comprising the income classification group -Low Income Africa,151 reveals that whereas Tanzania had 8.5% of the y and uncertainty regarding absorptive capacity under the impact of rapid emigration of expatriate administrators, and the conversion of the economy from a colonial plantation system to a mixed socialist system. There was also some wainess about lending until arrangements had been made to pay compensation for the nationalization of foreign owned assets immediately after the Arusha Declaration. By 1969 the Bank had sufficient confidence in Tanzania's record of political stability, tribal accord, and economic management to justify a significant increase in lending. 151, World Bank, World Debt Tables - Developing Country Debt, p. XLI, abridged version of 1986-87 World Debt Tables. 8.04 After reviewing Tanzania's Second Five-Year Plan (1969-74) and concluding that the investment program was not over-ambitious and that many physical targets were feasible, the Bank geared its lending program to support the Plan by a four-fold increase in direct lending compared with the 1964-68 level. The postscript to the 1970 Country Program Paper (CPP) records the Bank President's approval. Table 8,1: IBRD/IDA LENDING TO TANZANIA (US$ millions) COMMITMENTS DISBUSEMENTS Year* IBRD IDA TOTAL IBRD IDA TOTAL 1963 - 5.55 5.55 1964 - 16.89 16.89 1965 7.32 - 7.32 1966 - 6.03 6.03 1967 7.21 7.21 1968 - 5.00 5.00 1969 13.98 24.00 37.98 1.68 7.02 8.70 1970 41.49 9.07 50.56 1.24 9.42 10.60 1971 - 9.80 9.80 7.24 8.08 15.30 1972 6.74 10.80 17.54 13.35 2.73 16.00 1973 8.27 28.80 37.07 9.02 3.05 12.10 1974 65.00 61.20 126.20 8.26 5.90 14.10 1975 30.00 10.00 40.00 39.71 20.09 59.80 1976 37.00 52.00 89.00 10.34 29.05 39.30 1977 53.00 49.20 102.20 24.06 39.31 63.40 1978 25.00 73.50 98.50 27.43 24.35 51.90 1979 66.00 76.50 142.50 32.93 38.97 71.90 1980 - 109.20 109.20 34.27 35.02 69.20 1981 - 93.00 93.00 19.32 78.16 97.50 1982 - 75.00 75.00 9.94 96.93 106.90 1983 - 81.80 81.80 24.61 65.44 90.00 1984 - - - 24.64 49.49 74.10 1985 - 45.00 45.00 11.27 34.17 45.50 1986 - 186.00 186.00 6.80 85.38 92.10 1987 - 23.00 23.00 119.80 * Calendar "The President stated that the size of the lending program was satisfactory for the next two years but that it should if possible be expanded for the later years." By early 1973 the Bank decided to double its lending program for the 1974-78 period compared with the previous five years, justifying this decision by its satisfaction with Bank/Tanzania relations. The Country Program Note of March 1973 concludes: "Notwithstanding the %arious operational problems experienced by us, from a development institution's point of view, Tanzania comes close to being a model country. ... Government is seriously com- mitted to development in a climate of political and social stabil- ity... .a clear sence of direction, ... Development policies and priorities are generally well thought out, ... domestic resource mobilization effort is commendable,... monetary policies are re- sponsible. Many institutional changes have been made to suit the Government's socialist objectives and have inevitably led to ad- justment problems and temporary disruptions of many kinds, but the economy has continued to grow; ... we ... recommend a maximum Bank Group effort to assist the country in pursuit of its development objectives." Tanzania was designated a 'concentration' country and the Bank's role was to become increasingly comprehensive, with the number of lending operations going from under 3 per annum before 1973 to 7 per annum during 1974-80. Table 8.2: DEBT, DISBURSEMENTS, NET TRANSFERS (US$ millions) Debt Outstanding Calendar in undisoursed Disbursements Principal Net year IBRD+IDA IBRD+IDA Repayments Interest Transfers 1970 39 10 0 0 10 1975 161 60 3 5 52 1980 440 69 6 17 47 1981 529 97 8 17 72 1982 625 107 10 19 78 1983 698 90 14 17 59 1984 724 74 17 19 38 1985 834 45 28 20 -2 1986 961 92 29 26 38 19R7 1 196 94 28 30 37 Source: IBRD: World Debt Tables, 1988-89 Edition, Volume II. 8.05 However, during the latter period the Bank became increasingly concerned about lack of absorptive capacity, and the appearance of persis- tent macro-economic imbalances complicating economic management and eroding country creditworthiness. The turning point seems to have come in 1976. The 1975 CPP was very positive in support of higher lending. " We believe that a strong case can be made for raising the per capita allocation of IDA funds to Tanzania above the average for other developing countries. ... Given the size of the investment effort which Tanzania is making, ... the country should be receiv- ing as much assistance as possible. ... While we have demonstrated - 102 - in Section C above that Tanzania's creditworthiness would support the proposed volume of Bank lending, we would still recommend that overall Bank Group commitments to Tanzania should be on the most concessiunary terms possible because of the country's low per- capita income." The 1976 CPP expressed concern that " existing commitments may exceed Tan- zanian administrative and financial resources"; and that "the Government had been slow to recognize and to react to overspendiig which threatens the overall stability of the economy". Regarding the Bank's lending the same CPP made this comment: "acceleration in the Bank lending program over the past three years has raised several issues regarding the quality of Tanzanian performance and the effectiveness of Bank projects in different sectors." The turning point in Bank attitude seems to have been related to the new insights into the Tanzanian economy gained by the mission which visited the country in July/August 1976 to prepare the Basic Economic Report of 1977. As mentioned earlier this was the first to raise fundamental issues about the Tanzanian development strategy and policy environment. 8.06 By the beginning of 1980 the Bank concluded that, in the absence of adjustments in Tanzania's economic policies and institutions, a contin- ued large program of lending would be of limited benefit to the country. Average lending during 1980-85 at US$71.5 million was less than three-quar- ters that during 1974-79; in real terms probably less. By comparison, average Bank lending to Africa increased by 80%. There were no commitments made during FY 1984; the decision having been made to suspend the presenta- tion of proposals to the Loan Committee until agreement was reached with Tanzania on a structural adjustment package. In 1986 such an agreement was reached and a new phase in Bank lending commenced. 2. Composition 8.07 The composition of Bank lending viewed from three aspects - sectoral distribution, project/policy basis, and IBRD/IDA blend - his undergone significant changes over time. Planning of Bank lending has paid overt attention to these aspects and available documentation allow these changes to be traced. Iab[*..LS LEMA BY SECTOR (Units U58ilaion) Sector !eas-72 FY7 FY74 FY75 FYm6 FY FY78 Fall FYe0 FV81 FY82 FYe FY84 FYS FrS Agri and Rural 27.45 18.50 88.50 28.00 28.00 81.20 58.60 14.00 59.00 12.00 Induatry and OFC - 6.00 15.00 15.00 23.00 15.00 118.00 25.00 10.00 24.80 Energy 835.2 5.00 80.00 30.00 20.00 85.00 8.00 40.00 Transport and Cammunicationa 80.89 15.01 10.20 15.00 20.50 2.50 27.00 27.00 78.00 Education 14.15 10.80 11.00 12.00 25.00 Vater ) ) Urban ) 8.50 ) 1L.00 12.00 14.00 4.00 22.80 Program. *tc. 80.00 15.00 50.00 9o.20 Technical Amaetznce 6.00 11.00 12.00 10.00 Othera 157.19 48.01 47.50 91.70 60.40 114.20 95.50 162.50 71.80 155.80 75.00 61.80 - 45.00 209.20 2.1 Sectoral Distribution 8.08 Bank lending direct to Tanzania during 1963-73 went mainly to infrastructure. There was lending to four sectors; transport/communica- tions, energy/power, agriculture, and education, (Table 9.3), but the in- frastructure sectors together accounted for 652 of total commitments. In addition, all the loans made to the EAC (guaranteed by Kenya, Tanzania, and Uganda) during this period were also to the transport/communications sec- tor, ensuring its dominance and accounting for a half of total lending. 8.09 During 1973-80 emphasis in lending shifted to the productive sec- tors, initially agriculture. In 1969 a Bank mission reviewing the Second Five Year Plan (1969-74) recommended support for the Government's decision to give greater emphasis to the directly productive sectors especially agriculture/rural development, and in 1972 the Bank decided to reflect this support in its lending program. The CPP of that year explicitly statedt "In summary, this proposed strategy aims at an important shift in emphasis !rom roads and power to agricultural projects and general rural development." This shift was reflected in the Five Year Lending Program for 1973-77 and in most programs up to that for 1980-84. 8.10 For the year 1975 emphasis in planned lending shifted to industry. By the end of 1974 a UNDP financed group of Harvard experts had assisted the Government in drafting a long-term induf.rial strategy and a Bank in- dustrial/mining mission returned from a visit expressing broad agreement with this strategy although with some reservations. Even before this mis- sion reported the 1974 CPP planned support for the industrial sector. "While awaiting the conclusions of that mission, our planning is based on support for the Government's industrial strategy for the next few years ... and makes provision for three industrial proj- ects in the lending program. ... textile mill (Industry I), and industrial estate (Industry II). Industry III has not been iden- tified so far. Wood and wood product industries probably offer good possibilities." In the 1975 CPP not only is the stated focus of Bank lending the directly productive sectors--agriculture/rural and industry/mining--but of the two a higher share is envisaged for industry during 1977-81 due to the inclusion of several large projects not in the preceding CPP, e.g., pulp and paper, soda ash, and TIB II. However subsequent CPPs all planned that agricul- ture/rural would have the larger share among the two productive sectors. 8.11 Actual lending (commitments) during 1973-79 did conform to the planned emphasis on the directly productive sectors, but the extent of the shift was less than intended. The share of infrastructure was more or less as intended so that the shortfall in the share of productive sectors was due to the two program loans which were not provided for in the five year lending plans. (See Tables 9.4, 9.5 and 9.6.) The distribution of actual lending within the productive sector group did not conform to plans. The share of lending to agriculture/rural always fell short of planned, while lending to industry almost always exceeded its planned share. This was partly due to heavy lending to industry in 1979, 1980 and 1983. Tabl..4: COMOSITION OF PLANED LING FR001MS (Unit: percent) Sector 1973-77 1974-78 1978-0 197781 1978-82 1979-8 1980-84 1981-85 1982-88 (CPP-1978) CP-1974 CPP-1975 CPP-1978 CPP-1978 CPP-1979 CPP-1980 CPP0961 Agri/Rural 82.6 86.8 42.4 88.8 89.0 81.8 27.7 38.8 12.1 Industry/DFC 9.8 9.8 28.8 89.5 jA 28.1 22.8 20.8 9.2 8.4 Energy 6.5 8.8 7.1 8.8 Lk 8.6 12.8 12.8 18.0 6.9 Tranaport and Communications 18.2 9.8 6.7 1.9 12.5 20.0 21.7 28.0 14.0 Education 18.2 5.2 8.2 8.9 1.7 4.8 6.4 7.8 5.7 Voter ) 4.6 ) 8.8 8.4 4.8 5.7 i 4.0 4.7 4.2 2.2 Urban ) } 2.8 2.9 6.4 2.8 0.7 Program Lending - - - 23.4 48.6 Technical Assistance - 1.6 1.4 Others 8.8 8.9 8.2 4.8 Total. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 La Including mining. lk Power. Zg Including saerage. Tale.11: COMPOSITION OF ACTUAL LEDBING (COUNITMENS) (Unit: percent) Actual Sector 1968-72 1978-77 1974-78 1978-79 1977-81 1978-02 1979-88 1980-84 1981485 190246 (CPP-1972)(CPP-1978) CPP-1974 CPP-1978 CPP-1978 CP-1978 CPP-1979 CPP-1980 CPP-1981 Agri/Rural 21.6 89.8 48.8 26.9 26.8 24.9 15.7 22.4 20.1 8.1 Induatry/DC 16.5 18.1 85.1 81.6 29.6 82.1 15.4 9.6 6.8 Energy/Power 29.8 9.8 8.8 8.7 10.0 8.9 15.6 22.1 17.8 26.8 Traneport and Communications 88.8 7.0 6.2 8.7 6.8 11.6 0.1 7.7 15.1 26.1 Education 10.7 6.0 2.7 4.4 6.2 6.6 8.8 6.5 7.0 0.0 Voter - - - - Urban 6.8 8.7 9.8 6.8 5.4 7.4 8.9 7.4 6.9 Program Lending 12.8 11.0 8.6 10.8 8.9 9.1 18.0 14.0 25.1 Technical Assistance 1.7 1.4 1.1 1.8 4.. 4.2 6.0 9.2 8.7 Totals 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Table 0.81 DEVIATION OP ACTUAL FROM PLANNlD COMPOrTI OP LMING (ITi pereat) 1I8-7 3E0:?173-79 1077.-1 L.- 1R.t:B no. UA H Agri/Rural -12.0 -15.2 -1.5 -10.8 -14.1 -16.1 -. 6. *1.0 Industry/DFC 0.7 0.8 8. -7.09 8.5 @.8 *4.9 0.4 .11 Energy/Power 8.8 -0.2 -1.4 8.2 3.1 2.6 .8 4.6 SM Transport and Communications -4.2 -8.1 2.0 4.4 -0.9 *10. -14.0 -.09 1e.1 Education -7.2 -2.5 1.2 2.3 4.9 2.8 0.1 -0.5 -S.? Water and Urban 2.0 -0.1 0.6 -0.4 -0.8 8.4 -4.4 0.7 4.0 Program Lending, etc. 12.6 11.0 6.6 10.8 0.0 0.1 18.0 -9.4 *8.5 Technical Assistance 1.7 1.4 1.1 1.8 4.1 4.3 6.0 i.0 4.5 Other -5.8 -. -.3 -4. 8.12 Since 1980 the Bank has reduced its planned share of lending to the productive sectors below that to infrastructure. Largely as a result of its dissatisfaction with the policy environment in Tanzania, the Bank decided to limit further project lending to a small number of projects which could be justified even in the prevailing circumstances. Between 1983 and 1987 the Bank made no now comitments to the productive sectors. 8.13 Bank lending to the social sectors has accounted for only about SS of total compared with the productive and infrastructure groups with about 38% each during 1963-86. The share of lending to education (the social sector in which the Bank was mainly involved) was planned to decline to a low of 1.9% in the 1977-81 program.152 Bank lending was mostly for post. primary education geared to meet projected mapower requirements. By 1975 there was concern in the Bank as to whether further espansion in post-pr.- mary was justified. The Government's priority was plainly universal pri- mary education. However, by the end of 1977 the Basic sconomic Report found that earlier manpower forecasts had significantly underestimated highliddle level employment expansion and that a large percentage of these jobs had to be taken by inadequately qualified workers. At the eame time the demand for places in fee-paying private secondary schools was calling for an expansion which was occurring at the expense of quality sccomeds- tion and instruction.153 These facts suggested that there was scope for further investment in post-primary education. This was duly recognised is the 1978 CPP; lending plans were made accordingly and comitments were made in 1979 and 1981. 1l See CPP of 1975. 1 See Volmse II, Chap. 4, the ucation Sector, page 9. 2.2 Project-Based/Policy-Based Lending 8.14 The composition of lending also underwent a significant shift from project-based to policy-based loans, in line with the Bank-wide tendency. The initial shift was essentially an unplanned response to the first oil crisis in 1974. The 1974 CPP did not "see the need to propose a program loan to combat balance of payments effects of the recent international price shifts" largely because it was expected that IMF resources potential- ly available to Tanzania would have been able to keep the loss in reserves within manageable limits. Shortly after the discussion of the 1974 CPP a Bank mission appraised the progress on the policy understandings relating to a possible program loan. It characterized as impressive the policy initiatives adopted by the Government to meet the economic crisis. These initiatives included a judicious blend of demand management measures to restrain private and public consumption (agreed with the Fund), investment restructuring in favor of the directly productive sectors, an incomes pol- icy, and improvements in the export incentives to industry. The first program loan amounting to US$30 million was made in December 1974, and a second loan of US$15 million was made in March 1977; the reduced amount reflecting concern over the delay in reaching agreement with the IMF over access to second credit tranche resources. 8.15 In 1978 Tanzania requested a third program loan. However, the Bank, while willing to begin to discuss a possible loan, indicated that agreement on a stabilization program with the Fund would be a prerequisite for such discussions.154 The Bank also said that it would wish to focus on longer term issues, in particular the need for a clear and precise action program to promote exports. A Bank mission to Tanzania in July/August 1979 gave the Government an aide memoire detailing such a set of actions. It was agreed that the recently concluded study of export incentives would be the basis of a program of measures to expand exports, and in addition there would be measures to increase domestic resource mobilization and to con- strain the size and composition of the development expenditure budget. The 1980 CPP being prepared at the time provided that nearly one-quarter of the 1981-85 lending program would be policy based loans. 8.16 The Bank approved the US$50 million Export Rehabilitation Credit (ERC) in April 1981. The ERC was to have been the first in a series of discrete adjustment lending operations over a period of five to six years; and the Bank's plan for 1982-86 allocated 48.6% of targetted lending to such operations. In the face of considerable delay in reaching agreement with the IMF on an appropriate stabilization component, it was not until November 1986 that Tanzania was able to reach agreement with the Bank on a Multi-Sector Rehabilitation Credit of US$96.2 million--a US$50 million IDA credit plus US$46.2 million from the newly created African Facility. 154/ See Memo to files by Chief EACPI d/d Oct.25, 1978 - Mr. McNamara's Meeting with the Tanzanian Delegation. 2.3 IBRDIDA Blend 8.17 The blend of IBRD/IDA became progressively softer (more IDA) after the first lending operation in 1963. Because all lending to the EAC was on IBRD terms the blend to Tanzania was relatively hard during 1963-73 with IBRD being more than 50 percent. After 1973 Bank lending plans argued strenuously that Tanzania be allocated IDA resources above the average per capita per year for all IDA countries in the Eastern Africa region. The case for this treatment rested on the proposition that a development strat- egy such as Tanzania's, with the joint aim of growth and equity was probab- ly likely to reduce growth during the earlier years and consequently affect ability to mobilize domestic resources for development. It was thought that countries having slow growth for this reason rather than for failure to address major development problems should be put in a favored category for IDA resources. And it was argued that Tanzania, with its dedication to development and the imagination and resolution with which it was pursuing it, deserved the benefit of doubt and should be in the favored group. Other factors considered were low per capita income and the attention given to Bank recommendations in the policy dialogue. By the end of 1976 Bank plans were proposing a 25:75 IBRD/IDA blend in the direct lending for 1978-82. The overall blend rapidly approached that in direct lending after the break-up of EAC. With the intensifying foreign exchange crisis after 1978 and the continuing decline in exports, plus the delay in taking effective counter-measures, serious questions were soon raised regarding Tanzania's creditworthiness for continued IBRD lending. The 1980 CPP in addressing the issue stated; "The decision to introduce and increase the IBRD program in Tanza- nia was based on two considerations: the Government's willingness to make politically difficult economic policy decisions, and the conservative financial policy of Government. Under the present circumstances we do not believe that these criteria are being satisfactorily met. ... Specifically, we would propose that all IBRD lending be omitted from the program until (1) the Government develops an adequate policy package to address the current eco- nomic problems;" This was the decision of the review. Since 1981 there has been no new IBRD lending, the blend becoming very soft at the expense of a more adequate flow of resources to the client. 3. Cofinancing 8.18 The mobilizing of non-Bank resources in support of its operations has been another important aspect of Bank lending to Tanzania. Available records show that up to the end of FY87 the Bank had arranyd US$735 mil- lion in cofinancing, equivalent to half of total lending from Bank re- sources and raising to almost US$2,300 million the total resources mobil- ized in support of Bank operations in Tanzania. The ratio of cofinancing to Bank lending has increased over time, from about 10% before 1973 to over 50% during 1974-79, and to over 70% during 1980-85. The slippage to under 40% in 1986 probably reflects the fact that the Multi-sector Rehabilitation operation was part of an exercise involving many members of the Consulta- tive Group in pledges to assist outside of the Banks structural adjustment lending operation. The sectoral emphasis of cofinancing has been on en- ergy/power and industry/DFC, accounting for about a third of the total in each case. The predominant source of cofinancing has been the bilateral, contributing about 80%, with multilateral institutions contributing the remainder. Sweden and the Federal Republic of Germany are the first and second largest among bilaterals, with 18% and 14% respectively. Nordic sources*, countries and the Nordic Investment Bank, accounted for 36% of total cofinancing; a dominant position consistent with their importance in direct financial assistance to Tanzania. Table 8,7: COFINANCING BY SECTOR (Unit: US$ million) To FY72 FY73-79 FY80-85 FY86 TOTAL Agri/Rural 3.2 63.4 1.6 68.2 Industry/DFC - 205.5 37.0 242.5 Energy/Power 12.0 67.1 181.9 261.0 Transport and Communications - - 60.3 26.0 86.3 Education - - 20.0 20.0 Water - - Urban - - Program, SECAL - - 7.1 49.9 57.0 Technical Assistance - - Totals 15.2 33t;.0 307.9 75.9 735.0 Table 8.8: COFINANCING BY SOURCE (Unit: US$ million) To FY72 FY73-79 FY80-85 FY86 TOTAL Canada 17.8 10.2 28.0 Denmark 17.3 29.9 47.2 France 24.0 24.0 Finland 9.1 9.1 Germany Federal Republic .0 28.5 19.2 105.7 Italy 3.8 10.0 13.8 Japan 40.0 20.0 Kuwait 33.0 20.0 53.0 Netherlands 11.0 17.5 13.2 41.7 Norway 2.0 6.2 49.6 57.8 Sweden 12.0 68.1 43.5 11.0 134.6 Switzerland 9.8 9.8 U.K. 30.6 0.3 7.7 38.6 U.S.A. 2.0 2.0 African Development Bank 19.4 5.0 24.4 Arab Bank for Economic Development of Africa 5.0 5.0 EEC 25.0 29.5 54.5 IFAD 12.0 12.0 Nordic Investment Bank 18.r 18.0 UN-CDF 1 1.5 OPEC 16.5 12.0 22.5 Other 1.2 10.6 11.8 Totals 15.2 336.0 307.9 75.9 735.0 Evaluation 1. Size of the Lending Program 8.19 During the seventies the level of lending to any country was de- termined in a two stage process. First, normative lending level (usually for countries in a Region) was determined on the basis of population, per capita income, and performance. The total for all countries would approxi- mate the overall Bank-wide lending assumptions based on projected availa- bility of IBRD and IDA funding. Second, decision was made on whether and where a particular country was placed above or below the norm for the Re- gion to which it belonged. Absorptive capacity limitations as judged by the Regions and creditworthiness and Bank exposure considerations were the main factors influencing this decision. Given this process any question regarding the appropriateness of the level of lending to Tanzania must focus on the perception of absorptive capacity and its influence on lend- ing. Earlier it was pointed out that during the 1970s there was a rapid increase in average lending per capita to Tanzania to a level well above the average for the twenty-eight African countries classified by the Bank as low income developing countries; followed by a sharp curtailment after 1980 to well below the average for the group. 8.20 Available evidence suggests that the Bank was well aware of the limitations on Tanzania's absorptive capacity before and after substantial- ly increasing lending. The Bank's response was not to curtail lending but to follow a strategy aimed at increasing absorptive capacity while increas- ing lending. The strategy was to involve the provision of technical assis- tance ih project identification, preparation and implementation; selection of easier, less complex operations; and better supervision. It seems Bank staff regarded disbursement as an exact indicator of absorption, and the approach would have simultaneously served the objective of increasing dis- bursements and lending. Due largely to an increase in the number of opera- tions and a change in composition of the program - the inclusion of quick disbursing program loans and loans to financial intermediaries,- disburse- ment during the latter half rf the seventies was fourfold that during the earlier half. However, rapid disbursement was not accompanied by improve- ments in effective utilization of resources as evaluation of individual projects will confirm. Taa nia was reluctant to use Bank financed techni- cal assistance. The Bank was naive in its perception of the ease with which constraints on absorptive capacity, especially those inherent in the political and institutional environment, could be relaxed. 8.21 Although there is evidence that the Bank became aware of this situation within three or four years there was no immediate consideration given to reducing the lending program, which it continued to justify on the grounds that the dialogue with the Government was good and that the Govern- ment had shown willingness to take difficult measures. The 1977 Basic Economic Report ushered in a change in the way the Bank looked at the ab- sorptive capacity problem. Focus shifted to the public sector investment program's total demand on absorptive capacity, and it was concluded that the Tanzanian development program was too large, i.e. overcommitted in terms of financial and human resources. Hereafter, the strategy became that of urging the Tanzanians to consolidate. Tanzania was dissuaded from undertaking some large investment projects, e.g. Stiglers Gorge hydro-elec- tric project; and its planners were made more aware of the recurrent expen- diture implications of ambitious targets in the social services, e.g. uni- versal primary education and basic health centers. However, Bank lending commitments did not peak until 1979. Obviously, considerations of absorp- tive capacity ceased to guide the size of the lending program. 8.22 There was no attempt in Bank analyses to link overcommitment to the level of external financial support Tanzania was receiving from all donors, including the Bank. Tanzanian overcommitment was at least partly the result of foreign financial assistance. External loans and grants accounted for 60% of development ex1anditure during the seventies, but projects accounting for a much larger percentage of planned development expenditure had foreign support. Bank group disbursements on average were 23% of the capital budget during 1975-78 and fell to about 12% during the next three years only because the budget was swelled by defense related expenditure. 8.23 The Bank failed to reduce its lending program until long after economic reports called attention to the overcommitment issue. This prob- ably can be explained by several, not mutually exclusive, considerations. One is that pressures to lend combined with an incentive system which com- mended staff on the basis of the number and amount of new commitments mili- tated against a cutback in lending to any country. Another is that lending was being driven by the availability of a pipeline of projects built up during the 1974-77 period of optimism, and coming on stream with the normal time lag. A third explanation is that with the close relationship and good dialogue up to 1978, and the series of external shocks -the break-up of EAC, the war with Uganda, and the oil price crisis - all within 1978-1979, the Bank was reluctant to appear to be putting pressure on Tanzania. 8.24 Since 1980 the level of lending would seem to have been determined on the basis of the objective of maximizing Bank leverage in policy discus- sion; and no doubt reflected the shortage of IDA funding. There has been lending only for those projects which should be undertaken irrespective of the policy environment, the remainder of at least 50% being for policy- based lending. The Bank's position has been reflected initially in the practice of proposing a level of lending which would be realized "only on the assumption that a policy dialogue with the Government will be suffi- cient to justify a major transfer of non-project assistance. Should such a dialogue fail to materialize, or prove to be difficult and lengthy, the level of commitments would be reduced accordingly".155 This position was hardened significantly by management decision in 1983 "not to process any further projects for Tanzania until there was significant progress on an effective economic adjustment program"; the linking of project lending to macro-conditionality was justified on the ground that "it was no longer possible to isolate projects from the general economic environment".156 8.25 The conclusion suggested by the review is that before tl-e 1980s, the Bank's lending program was too large. Absorptive capacity although considered was never realistically seen as the durable constraint it turned out to be, and was not appropriately addressed. The initial strategy to enhance absorptive capacity was based on misjudgments and naive in its interpretation of Tanzania's development strategy. Subsequent emphasis on overcommitment failed to recognize the role of external financial assis- tance as a causal factor, and hence the need for a coordinated reduction in inflows in order to provoke a reduction in the development budget. The Bank, by maintaining a level of lending unwarranted in the face of the absorption constraints did not provide the appropriate signal to other 155/ IBRD: Tanzania CPP , October 1981; para. 62. 126J/ Bank Memo: TANZANIA - Current Economic Developments and Future Bank Group Lending, July 8, 1983. - 113 donors in a timely fashion. The shift toward policy-based lending in the 1980s, while tending to reduce the importance of absorptive capacity, re- quired that the Bank give attention to the capacity to undertake policy reform. Bank assistance in this direction has been limited. Tanzania's rate of policy adjustment has been slow due in large measure to deficien- cies in ability to design the needed changes. This must be addressed be- fore entertaining the expectation that the plethora of changes required under SALs and SECALs can be undertaken efficiently, and quickly. Mean- while, absorptive capacity constraints continue. While not presenting a problem to the much diminished level of project lending, they must be addressed before any attempt at restoring such lending to previous levels. 2. Composition 8.26 Ideally, the composition of the lending program should be planned on the basis of an awareness of the possible effects at the macroeconomic level (e.g. on investment and manpower requirements), of intersectoral linkages, and of the gestation period of the various operations. Inade- quate attention to these matters will result in lending programs that lack balance and suffer from sub-optimal timing of some components. This seems to have been the case with the lending programs for Tanzania especially during the last decade. 8.27 The mix between policy-based and project-based lending has changed dramatically, but there has been little concern within the Bank that the shift may adversely affect the level of investment. Tanzanians have argued that policy based lending has facilitated the importation of inputs to permit use of idle industrial capacity, but given that this ca- pacity was designed to produce consumption goods for Tanzanian use, part of policy based inflows support consumption rather than investment. Thus some Tanzanian officials see policy-based lending as adding to the debt burden and not enough to the stock of productive capital, and would counsel avoid- ing it. The case agaiist policy-based lending cannot be made as simply as this, but the onus is on the Bank to ensure that the rate of growth in the medium and longer term associated with the higher level of economic activ- ity made possible by such inflows is at least as high as it would have been under alternative approaches. 8.28 In a sense the idea of a core investment program comprised of projects which the Bank will finance only if certain policy conditionality is met, seems to be an answer to the criticism that policy-based lending mainly finances consumption. Its use in Tanzania could provide the Bank leverage in policy determination without shifting the balance in lending so far and for so long that production response runs the risk of being con- strained by infrastructure and other bottlenecks at the sector level. Policy-based lending should anticipate the infrastructure and other re- quirements for effective response by the productive sectors, but even if it does this, it invariably diverts support from these sectors when there are tight limitations on overall lending. Clearly, a move in the direction of setting macro-conditions on an important part of the lending for projects could serve to urge policy reforms without diverting resources from invest- ment in crucial sectors. This does not rule out the possibility of retain ing some policy-based lending, but it could minimize dependence on it as the only way of getting a dialogue on macro issues. 8.29 A related issue is the balance within project-based lending between infrastructure and productive sector lending. The main problem concerns the Bank's sequential approach which did not lend itself to the need to pay attention to the intersectoral and interindustry relationships. In the 1960s the Bank correctly regarded the development of transportation, communications, power and water as crucial to the growth and transformation of the economy, and supported investments in these sectors initially through loans to the EAC. However, during the seventies after it had shifted the emphasis of its support to the directly productive sectors- -agriculture and industry, the Bank failed to reassess and monitor the adequacy of infrastructure to meet the needs of these sectors. This was especially crucial, since the overexpansion of the development program had starved infrastructure of resources for adequate maintenance; a fact of which the Bank was aware. The foreign exchange crisis of the late seven- ties and early eighties prolonged this erosion of infrastructure due to inadequate maintenance. The attempt by the Bank to redress the balance in favor of the transport and communications sector was late in starting. In addition, it was compromised by the near total eclipse of Bank attention by structural adjustment after 1980, and the drastic reduction in lending which it provoked. In 1983 a letter from the Resident Mission pointed out the impossibility of finding transport to move crops especially coffee and cotton from the interior to the main port. As late as 1987, an OED mission observed that inadequate storage and transportation were impeding collec- tion and marketing of cotton and maize, the production of which had re- sponded to price poliy changes. 3. Effectiveness 8.30 There is no way of isolating and measuring the effects of Bank financial support on the achievement of Tanzania's development objectives. This is due mainly to the complexity of the development process, but is made even more impossible by the large amount of support which Tanzania receives from a large number of sources. The problem arising in this situ- ation is that of trying to gauge effectiveness without being able to mea- sure effects. In the absence of objective measures of overall effective- ness the subjective impressions of a large sample of Tanzanians and Bank staff, and review of documents underlying lending program decisions as well as the experience of individual lending operations, form the basis for judgements of the overall lending function. Sectoral details are presented in Volume II: Sectoral Relations. 8.31 Tanzanian officials and Bank staff share a general sense of disap- pointment over the lending experience of the last two decades. The Tanza- nian view is that Bank Group lendIng for infrastructure, e.g., roads, ports, power and telecommunications, has been effective; while lending for the productive sectors and for rural development has been generally unsuc- cessful, citing the Cashewnut factories, the Morogoro Shoe factory, and integrated rural development projects (Kigoma, Tabora, Mwanza-Shinyanga) as some examples. Their perception is that the Bank helped them to make mis- takes but has abandoned them in their search for remedial measures to res- cue some flow of benefit to offset at least partially the debt burden of these failures. Bank staff are generally disappointed over the lack of apparent fruit of the Bank's efforts in support of Tanzania's development. Their continuing concern is that even those projects which were successful- ly implemented may now be languishing for want of maintenance. While these perceptions do not constitute an adequate overall evaluation of effective- ness, they do point to the conclusion that Tanzania has not benefitted adequately from the lending that the Bank has done, and that the sustaina- bility of the limited benefits is in doubt. 8.32 Bank lending was largely ineffective because operational objec- tives were unclear and were unsuitable guides to the decisions which had to be made. This refers particularly to the period after 1972 when the Bank, finding that Tanzania's development outlook was in harmony with its own, seems to have set as its main objective that of transferring resources to Tanzania. Such an objective was unhelpful in guiding the decisions regard- ing optimal size and composition of the lending program. Besides, this objective and the related strategy were not placed within a realistic time horizon. The Bank apparently accepted unquestioningly the Tanzanian view that "they must run while others walk" and tried to work within a strategy characterized by unrealistic targets for social progress without enough attention to defining the range of the possible. Thus, need was given higher priority than absorptive capacity in determining amount of lending. 8.33 Lending was less than effective also because decisions were made and operations designed before the base of information and knowledge had been laid or without enough attention to it afterward. The shift in compo- sition toward the productive sectors was clearly premature, occurring before analysis and understanding of the economic implications of Tanza- nia's essentially socio-political goals of developing socialism and self- reliance, and continuing long after economic and sector work raised serious questions about the policy environment. Since 1980 the economic crisis has forced Tanzania to abandon or downplay its strategy, at least temporarily, and hence provide scant guidance to Bank lending. Bank lending has been without benefit of an agreed perspective on the country's development pos- sibilities, withou: which even a strategy limited to rehabilitation could be wrong, much less one which has structural adjustment as its centerpiece. Adjustment toward a system or structure not in keeping with what the coun- try wants or where it wants to go, would be doomed to failure. 3.1 Project Lyvl 8.34 The Bank's project-based lending is intended to increase the out- put of goods and services by anlarging physical productive capacities, by improving the ability of institutions to plar., implement and operate in- vestment projects and production programs, and by raising the level of human skills including the managerial. The effectiveness of a lending operation in affecting output can be gauged albeit imperfectly, by capacity utilization, financial viability of the agency, economic rate of return, achievement of physical targets and the extent of delays in completion. The assessment of effectiveness in improving institutions and in raising the level of human skills is based on subje.tive evaluation in the absence of suitable quantitative indicators. 8.35 A large share of Bank lending has gone to the productive sectors, where, in general, the impact on output has been miniscule. Judged by the mentioned indicators the sectoral experience was the following: Industry. In direct lending to industry, capacity utilization has been low--10% and 28% in textiles, 49% in paper and pulp, and 4% in leather products (shoe manufacturing); and massive financial losses of the operating enterprises have accumulated. Recalcu- lated rates of return on both textile projects are negative.357 In indirect lending to industry poor subproject performance has led to an unsound financial condition of the financial intermediaries. Agriculture. In the agriculture/rural sector, for 17 of 23 opera- tions which have been evaluated, all but one had re-estimated economic rate of return (ERR) substantially below appraisal esti- mate, 12 had negative re-estimated ERR.158 Infrastructure. The lending experience in infrastructure is mar- ginally better. With one exception, project results in the trans- port sector also did not match expectations.159 For 6 of 10 projects financed, re-estimated ERR are available; only one is equal to the ERR at appraisal, the others of which one is negative, are substantially less than the appraisal ERR. For the one with re-estimated ERR equal to appraisal ERR the project had a fundamentally different impact from that foreseen at appraisal and the ERR equality reflects a concurrence of circumstances significantly influenced by chance. Operations in telecommunications, energy and electric power, and water supply and sanitation were generally successful although they encountered significant delays.160 These projects involved fairly straightforward financing of a time slice of a development program. 1JU/ See: Volume II, Chapter 2 on Tanzania's Industrialization Effort 1981-87, Section VI Bank Lending for Industry and its Effectiveness. 1W/ See: Volume II, Chapter 1 on Review of AgricLIture and Rural Development 1961-1986, Section III Bank Lending. J2/ See: Volume II, Chapter 3 on Bank Activity in the Transport Sector, Section IV Bank Lending to its Impact. 1/ See: Volume II, Chapter 3A on The Bank's Role in Selected Sectors. 11 Social Sectors. In the social sectors results were mixed. The First and Sixth Education projects were successfully completed, while others in between may be rated partially successful as phys- ical targets for construction were not met, delays were substan- tial and operations hampered by staff shortages.161 The two projects in Urban Development had to be reduced in scope during implementation and encountered substantial delays and some financial difficulties. 8.36 The effectiveness of Bank Operations in institution building has been generally well below expectations.162 Telecommunications and electric- ity, where there was already a fairly good institutional base with which to work, seem to have been exceptions. Bank technical assistance has been mainly provided as part of the support to particular projects, and although there have been six free-standing technical assistance operations, they have been mostly oriented to the needs of specific projects and sectors, e.g. pulp and paper, petroleum, transport. Except for these free-standing operations, Bank efforts in assistance have not gone well. The Government of Tanzania, having access to abundant technical assistance as grants from othe.r donors, has been reluctant to draw on loan funded assistance. Provi- sions especially to hire foreign consultants in Bank loans but even for fellowships and scholarships in some cases, have been underutilized. 3.1.1 Reasons for Poor Performance 8.37 Analysis of project completion and project performance audit re- ports suggest that the reasons for poor performance lie in: (i) project design, selection and preparation; (ii) undue hurry to do follow-on proj- ects; (iii) supervision; (iv) infrastructure constraints; (v)deficiencies in skills and staffing in Tanzania; (vi) inadequate support by the Govern- ment; (vii) sector policies and (viii) the overall economic situation. The order in the above list of reasons reflects the degree to which the Bank rather than Tanzania may be culpable. Thus (i) to (iii) are clearly due to failings on the side of the Bank; (iv) is shared with the Tanzanians; and (v) is to a lesser extent a failing of the Bank. The remaining reasons reflect on the role of Tanzania, although the external international fac- tors contributed to the weak cverall economic situation. (i) Project design and planning has been cited in relation to poor performance of industrial, agricultural, transport, urban and education projects. A frequent criticism was that projects were too large and too complex, making for excess capacity, (e.g., textiles, leather goods), difficult implementation (RIDEPS and Highways IX, IV, V, Urban) and impossible supervision (Education IV and V). The Bank yielded to pressure from the Government to 161/ See: Volume II, Chapter 4 on The Education Sector: Section B, Bank Operations and Appendices 1 and 2. 162; See OED: The World Bank Institutional Development in Africa. increase the scale of several projects, e.g. Smallholder Tea, Geita Cotton, National Maize, Pyrethum. In indirect lending to industry, inadequate subproject appraisal has led to support of bad projects. In the case of direct lending the development of new textile mills instead of rehabilitating existing ones, over- sights in the design of the pulp and paper mill, and failure to deal with the problems of leather quality and to identify a suit- able joint venture partner are only some examples of flawed proj- ect work. The principal design flaws in agriculture projects were the lack of appropriate technical packages for most crops partly due to lack of involvement of Tanzanian staff in project prepara- tion, and misjudgment of input availability (e.g. cashewnut and meat processing) as warnings of Bank technical staff were (e.g. at RMEA) frequently ignored at design stage. In Education, project design was often not very well advanced at the time of project approval. This resulted in start-up delays, inadequate coordina- tion among project components and the inclusion of some technical components inappropriate to Tanzanian socio-economic and cultural circumstances, e.g. kitchen and domestic science equipment to North American standards. Even in the transport sector where engineering considerations loom large in overall design, some projects suffered because critical elements were missing e.g. an implementation plan for the different components (Highway III). In the case of Telecommunications, Energy and Electric Power, and Water projects design was not generally a source of problems. (ii) Undue hurry to prepare and undertake follow-on projects, before the lessons of previous operations were absorbed, has been cited as a cause of poor performance in lending in agriculture/rural, urban and education sectors. In agriculture/rural the causality between rapid project preparation and poor results is strong. Kilombero Sugar, Tobacco Processing and National Maize and the First Cashewnut projects which were hurriedly appraised all had low or negative economic rates of return. Lack of adequate time for consultation provoked local reluctance to cooperate with the projects. The Second Livestock and Second Cashewnut projects are examples where undue haste to do follow-on projects adversely affected outcomes; in these cases by making reckless assumptions regarding reversal of declining production trends in the raw ma- terial inputs. The haste to appraise new projects in education deviated the time and attention of supervision missions with ad- verse impact ongoing projects. In the urban sector, "launching of the second Sites and Services project without the lessons learned from the first was a major error." (See Urban Development in Chapter on Bank's Role in Selected Sectors.) (iii) Supervision has come in for both positive and negative mention as a factor in development of Bank-financed projects. Generally, the Tanzanian regard for Bank supervision has been high, especially in the case of straightforward physical infrastructure projects. Bank staff advice on such implementation problems as procurement has been deemed very helpful. However, in a few cases e.g. Educa- tion III and IV, where projects were complex; supervision missions were too short, inadequately staffed--too few educators, and dis- tracted by project identification work for future lending. Super- vision tended to be weakest when institutional development was an important component of the lending operation. While Tanzanian officials were positive about the value of Bank supervision of projects, the feedback to Bank management did not allow an early appreciation of the implementation difficulties encountered by most projects. This seemed to have been due in some part to undue optimism of the staff doing supervision and in others to failure of Programs and Projects to agree on the meaning of the informa- tion from supervision missions and on the appropriate content and tone of supervision letters to the Government. (iv) Infrastructure constraints, while indicative of the general state of underdevelopment, are so frequently mentioned as a factor in lending experience as to raise questions regarding the appropriate balance between infrastructure and productive sector in project lending and between project and policy-based lending. These questions are particularly relevant since the economic crisis curtailing the availability of foreign exchange and budgetary resources has been accompanied by significant erosion of the transport infrastructure due to lack of maintenance of what were low investment/high maintenance roads. Especially with the recent resurgence of some agricultural exports e.g. cotton, the shortage of rail and truck transport and of storage facilities has become a very obvious constraint. However, over a much longer period im- plementation of projects e.g. in education has frequently run into problems of lack of building materials due mainly to lack of transport facilities. In addition, industry sector projects have run into persistent bottlenecks in electric power. Even in 1987 infrastructure was still a bottleneck. (v) Deficiencies in skills and staffing has been a problem in almost every Bank project in Tanzania, and is specifically mentioned in the Chapters on Agriculture, Industry, Transport, Education, Tele- communications, Energy/Electricity and Water. The genesis of the shortage lay in Tanzania's indigenization push, the emigration of skilled expatriates and citizens of Asian descent, and an overly ambitious development program. This shortage required the use of imported managers and technical experts for assistance in project implementation, which was not always welcomed by Tanzanians, and gave priority to the inclusion of a training component in most cases. Some criticisms recurring in many project completion and audit reports is that this component was inadequately identified at project design stage, was usually late getting underway and generally did not reach target levels. One particular difficulty was the shortage of trainers and the failure of technical assis- tance personnel to fulfill their training responsibilities, often - 120 - because suitable counterparts were not provided and sometimes because terms of reference failed to define a monitorable training activity. Part of the shortage of skills for the investment pro- gram was due to the deployment of personnel for political work, to institutional inefficiencies resulting in overmanning, and to the decentralization of public administration. (vi) Inadequacy of support by the Government, particularly the non-or under-provision of counterpart financing affected the effective- ness of Bank lending in Education III and IV and in Water and Sanitation where the establishment of National Urban Water Author- ity was delayed for lack of financial support. In Electricity, the financial viability of TANESCO (the electricity parastatal) has suffered because of Government heavy participation (60%) in its accounts receivable. The major problem in transport sector Bank financed projects has been the unsustainability of benefits due to inadequate provision of funds for mainten6nce in the Gov- ernment's recurrent budget. (vii) Sector policies were most important in the impact of lending to the productive sectors- -agriculture and industry, where project success depended not only on public capital investment, but on producer response. In agriculture, the main factors causing the unfavorable sectoral policy environment included low producer prices, new land policies, policies affecting the use of labor, villagization, attempts at central planning curtailing the freedom of producers to make their own decisions, regulation of internal trade and distribution, unstable institutional arrangements--coops to parastatals and back, and uncertain access to foreign exchange. The industrial sector environment was characterized by the Basic Industry Strategy which emphasized the dominance of public sector production and the reliance on administrative discretion in pric- ing, allocation and distribution. This constituted a policy envi- ronment inimical to the success of private industry even where it had access to indirect lending through the TIB and TDFL. Policies in the urban sector were a factor in the performance of Bank lend- ing to that sector as Government's interest rate policies virtual- ly wrecked the Tanzania Housing Bank, a key institution in the sector. The World Bank was too willing to be flexible in accept- ing sector policies which involved large and unaffordable subsi- dies and a lax attitude toward collection of arrears. (viii) The general economic situation primarily reflected in an extreme shortage of foreign exchange and fiscal revenues, has been affect- ing the Tanzanian investment program since 1978/79, by curtailing the supply of imported inputs and delaying maintenance of infra- structure. Besides these supply-side effects, weak domestic de- mand for locally produced goods has retarded the response of pri- vate industry to indirect Bank lending through TIB. It is fair to say that the Bank did not anticipate the possibility of Tanzania suffering a severe foreign exchange constraint and the seriousness of its impact on the implementation of the country's development program. At the same time, the Government was slow to respond with appropriate policy actions. 3.1.2 Other Issues 8.38 At the level of individual projects many issues arise which will be discussed in the sectoral chapters. However, there are some which bear consideration at this stage. One concerns the role of Tanzanians in project identification. The conclusion suggested by a review of many projects is that Tanzanians did not participate meaningfully in the process. In many cases Bank staff alone or with other agencies identified projects which they urged on Tanzania. Local officials felt no sense of parenthood for such projects, and this attitude negatively affected implementation. Mini- scule or no involvement in identification by local officials did not favor a good understanding on how various components fitted together and the timing for their introduction. 8.39 One factor of importance in program identification was the lack of attention to risk, both as regards the inclusion of a number and the timing of the inclusion of high risk projects. The inclusion of complex, untried projects is a case in point; some examples being the RIDEPs and large in- dustrial projects calling for large external market of doubtful accessabil- ity to Tanzanians at their stage of sophistication in export promotion. The timing of some high risk projects during periods of intense economic crisis was also questionable, e.g. petroleum exploration. 8.40 On the implementation side the main issue concerns whether imple- mentation of Bank financed projects should be done through specially set up enclave units or through the regular institutional apparatus of the Govern- ment. The Bank has preferred to set up special units as an answer to insti- tutional weakness, attracting through high salaries the competent staff needed. In a situation of general shortage of highly skilled technicians and managers other areas and functions are correspondingly weakened. Be- sides, enclave units are not easily absorbed into the permanent structure of the public sector and tend to atrophy after initial project development, thereby leaving no implementation capacity for follow-up projects. Greater emphasis should be placed on the longer term development of implementation capability by giving permanent staff an opportunity to learn by doing under adequate supervision even if this initially means slower disaursement of funds and the need for more technical assistance and supervision by Bank staff. This would also dampen if not remove completely one source of pres- sure on salaries and of disaffection among Tanzanian civil servants. 8.41 In addition to the above-mentioned issues, a number of other com- ments about the Bank's approach to project lending seem warranted. First, the Bank did not have a coherent sector policy against which to plan its lending program and individual projects in some sectors. For instance, in water and sanitation the Bank lacked a policy of support to the sector's urban side, but on request from the Tanzanian Government it provided fi- nancing for two operations. In power and energy the Bank's approach was a project by project one, which led to lateness in developing sectorwide monitoring and strategy formulation. In transport, the problem was not that the Bank did not have a policy, but that there were differences be- tween the Bank and the Government on issues such as staffing and the use of technical assistance which obstructed sectoral planning and the elaboration of coherent policies. 8.42 Second, the Bank does have a legitimate interest in, and the cli- ent should understand and accept the responsibility to keep the Bank in- formed of, policy and institutional changes which are likely to affect the physical, economic and financial environment of a lending operation. Tan- zania was not always circumspect in this regard, and the Bank did not in- sist on more appropriate treatment. Some examples underscore the impor- tance of this point: a) In the Third Education Project approved in 1971, the rural training centers were changed into Folk Development Colleges, while the project was under implementation, without prior discussion with the Bank; b) the Geita Cotton Project approved in 1974 did not contemplate the compulsory movement of the entire population of Geita into villages within days of project effectiveness without prior consultation with the Bank; c) in the Kigoma RIDEP approved in 1974, the Kigoma Cooperative Union was abolished without consultation thereby necessitating the replacement of the whole management organization proposed at appraisal; and d) in the National Milling Corporation approved in 1980, it was announced immediately aftor negotiations and without prior consultation that the Corporation was to be decentralized as part of a significant change in food distribution arrangements. 8.43 The Bank was aware of and responded to the difficulties in imple- mentation. In the early seventies the Bank posted an advisor to a special implementation unit established in the Ministry of Agriculture, and set up and subsequently expanded the Resident Mission. Joint Bank/Government re- view of project implementation was started in 1977, on a monthly basis and with an in depth review every three months. These reviews gave tne Bank a much better understanding of implementation issues, particularly manpower and local cost financing. 8.44 That so many projects failed must be attributed to the insistence in lending for a large number of projects, and failure to adjust appraisal assumptions in the light of persistent shortage of skilled manpower and of intermittent shortage of local counterpart funds of which the Bank was fully aware. The attitude within the Bank was well reflected in a telex in 1979 which stated" inter alia, "not suggesting that we use the manpower issue to reduce the number of projects but it has a bearing on project scope, size and complexity". A memo to files shortly after confirmed that "across a wide number of sectors we have found that the manpower required for project implementation is hard to come by". One must conclude that, given the tight constraints on absorptive capacity, even valiant efforts to assist implementation could not have resolved the problem of having too many projects at the same time. 3.2 Non-Proiect Lending 8.45 Non-project lending to Tanzania has been in the form of a program loan (1974) of US$30 million, a program credit (1977) of US$15 million, an Export Rehabilitation Credit (1981) of US$51 million, and Multi-Sector Rehabilitation Credits (1986 of US$96.2 million (of which $46.2 million was from the African Facility). 8.46 Both program operations aimed to provide emergency balance of payments assistance in face of a sharp deterioration caused by falling exports'and rising imports of food grain due to drought in 1973/74 and by the rise in oil prices in 1974, in support of a policy package set out in a memorandum of understanding between the Bank and the Government of Tanza- nia. The Government agreed "(i) to increase investment program allocations to directly productive sectors; (ii) to review producer prices for agricul- tural products, particularly cash crops, and to improve implementation of agricultural projects; (iii) to increase productivity in the industrial sector, and particularly the working of parastatals and to stimulate ex- ports; and (iv) to restrain private consumption and to slow the rate of growth of recurrent public expenditures."163 8.47 The program credit involved no specific policy package, the pack- age outlined above agreed at the time of the first program loan also formed the basis of the second.164 However, "the principal objective of the Credit was to provide the means for a relaxation of import controls in order to stimulate economic activity." Tanzania had made considerable progress in some of the undertakings, especially in raising food grain prices, although producer prices for exports lagged behind export values. Trends in the fiscal situation also improved, thanks to a coffee price boom in 1976/77. Tanzania liberalized imports toward the end of 1977. The program credit differed from the earlier program Loan in one important aspect. While the loan had been approved after Tanzania had reached agreement with the IMF regarding access to the first credit tranche, and it had been envisaged that the program credit would have followed Fund approval of access to the second credit tranche, there was no agreement reached with the Fund because Tanzania's balance of payments position had improved. The Bank, decided that the agreement between Tanzania and the IMF for access to the first credit tranche was sufficient evidence of compliance with the IMF's requirement's to justify going ahead with the program credit (which would allow for liberalization of imports to stimulate production and investment and which was not provided for in the Fund mission's balance of payments forecasts].165 1j3/ See Report and Recommendation of the President to the Executive Directors on a Proposed Program Loan to the United Republic of Tanzania, November 25, 1974. A/ OED: Program Performance Audit Report; Tanzania - Program Credit (credit 688-TA) April 4, 1979. .Ji/ Memo: RVP-EA to SVPOP; TANZANIA - Proposed FY77 Program Credit, December 28, 1976. 8.48 These program operations undoubtedly fulfilled the basic objective of making available foreign exchange for essential imports, and the delay in the Credit waiting for a Standby Agreement between the Fund and the Government allowed it to coincide with the weakening of tne coffee prices and ensured that "resources provided by the program credit were not un- needed, simply prematureft,l66 In retrospect, success was more apparent than real; the decision to liberalize imports urged by the the Bank exacer- bated what has turned out to be an extended foreign exchange crisis, and raised questions concerning the technical quality of macroeconomic thinking which led the Bank to recommend piecemeal policy action with significant balance of payments risk, without adequate provision for suitable fiscal, monetary and exchange rate measures to defend the reserves, such as could have resulted form closer collaboration with the Fund at that time. 8.49 The Aide Memoire on Policy Understandings167 stated that "the size of the balance of payments deficits in 1974, 1975 and the projected trend of these deficits over 1976-80 indicate clearly that major remedial measures are required." It went on to state that "the objective of the Government's program therefore is to resolve the balance of payments con- straint through a judicious blend of demand management, restructuring of investment on productive sectors, ......... and restraints on private/pub- lic consumption demand." Significantly, the memo mentioned no ceilings for future Government budgets, but contented itself with the statement that the Government is making serious efforts to slow the rate of growth of public recurrent expenditures. No other demand management measure was agreed for 1977 and beyond; and, there was only reference to past measures taken to slow the rate of increase of private consumption. 8.50 Also significant was the expectation that producer response to higher prices for each crop would have been so quick as to permit an in- crease of over 75% in the value of exports between 1976 and 1980. This optimistic outlook on exports was clearly inconsisient with the "Baserun" Simulations contained in the 1977 Basic Economic Report which envisaged growth on real exports of less than 14% during the period, unless prices of exports were expected to shoot upwards in contrast to the long term trend. Based on its outlook on exports, the 1977 BER saw little room for import growth. Since the 1977 BER was based on findings of an economic mission to Tanzania in July/August 1975 and on major sector surveys in agriculture and industry and a special study of the Fiscal Aspects of Decentralization all undertaken prior to mid-1975, it is clear that two quite different views of Tanzania's balance of payments outlook coexisted at the same time in the Bank. One possible explanation for this is that some believed that the coffee price boom of 1975 would have continued; an unrealistic expectation given that the cause was a temporary setback suffered by Brazilian pro- ducers. AgW/ Tanzania - Completion Report, Program Credit (Credit 688-TA), April 4, 1979; (para. 12) 1JJ/ Annex VI of the Presidents' Report on a Proposed Program Credit to the United Republic of Tanzania, dated February 22, 1977. 8.51 As it turned out, export volumes grew more slowly than anticipated and the index of prices of the major exports declined after 1977. Mean- while, with liberalization, imports grew faster than the 14.5% per annum projected in Annex 1 of the President's Report, severely worsening the trade deficit and eroding reserves by the end of 1978. Thus on policy grounds, this policy-based operation was essentially flawed and must be rated a failure 8.52 The next policy-based operation--the Export Rehabilitation Credit of 1981*--was approached with much greater caution on the part of the Bank and of Tanzania, and was agreed only after another Standby Agrc3ment had been reached between Tanzania and the Fund in October 1980. The objective of this credit was to increase export earnings by reversing the decline in traditional agricultural exports. This was to be achieved by (i) improving producer prices of major export crops; (ii) ensuring foreign exchange for imported inputs required by exports and complementary sectors; (iii) im- proving efficiency of agricultural parastatals; (iv) improving the foreign exchange allocation and import systems; (v) providing better incentives to non-traditional exports. In addition, Tanzania was to (i) review the ongo- ing and proposed public investment program; (ii) strengthen the planning and budgetary functions of government; and (iii) preface an action program to improve research, extension and support services in Agriculture. These requirements were reflected in a list of some thirty conditions, some of which had to be met prior to credit effectiveness. After effectiveness there were problems and considerable delays and resistance by Government to allow bilateral donor's support to go through the allocation mechanism agreed with the Bank. 8.53 The ERC did not achieve its objectives. Aggregate export earnings ard volumes continued to decline. The failure of the effort was due in I irge measure to the lack of an adequate policy dialogue between the Bank ard Tanzania at the time, and to disagreements within the Bank regarding the appropriate content of an adjustment package for Tanzania, specifically on the role agriculture should play and on the importance of measures for agricultural recovery. The main lesson for the Bank in addition to remedy- ing the mentioned reasons for failure, was that in policy based operations the availability of monitorable indicators and associated data base are indispensable to success.168 8.54 The fourth policy-based operat'on, the Multi-Sector Rehabilitation Credit (1986) (MRC) was approved after Tanzania had developed its own Eco- nomic Recovery Program (ERP), taken significant measures in pricing, fiscal management, and exchange rate adjustment; and had reached agreement with the IMF on access to its Structural Adjustment Facility (SAF). The ERP aimed at achieving a positive growth in income per capita, reducing infla- tion, and strengthening the balance of payments; by reducing distortions in resource allocations and by exercising fiscal and monetary restraint. This program has attracted considerable international bilateral support. On the 168/ See Program Performance Audit Report - Tanzania: Export Rehabilitation Credit (1133-TA)). basis of measures taken, the continuation of exchange rate and interest rate adjustments, trade reform, decontrol of prices and fiscal restraint during 1987, the Bank in January 1988 approved supplemental financing for the MRC. Recent data suggest that the EDC supported by the MRC is having the desired effect. While it may be too early to claim complete success, some lessons are emerging. These mainly relate to the importance of co- ordination among donors, of Bank/Fund collaboration on technical aspects of policy conditionality, and of a sensitive approach to dialogue in a situa- tion of cleavage between the pro-adjustment and contra-adjustment political power .blocs in the country. 4. Conditionality 8.55 As the share of policy-based lending in total lending increased after 1974, conditionality (i.e. the requirement to change policies, proce- dures, and institutions) became increasingly important, comprehensive and complicated. The main issue from the standpoint of lending concerns the willingness and capacity of the client to satisfy conditions and hence trigger disbursements. As in project lending the actions implied by the conditions have to be identified, agreed and implemented. In other words, there is a "policy cycle" that is a counterpart to the familiar "project cycle". The experience in Tanzania suggests that the Bank has been slow to appreciate that given the scarcity of high level manpower in national eco- nomic management, and the demand on their time for crisis management, Tan- zania needed assistance in identifying the feasible policy alternatives for achieving specified objectives. 8.56 The experience also suggests that the Bank paid inadequate atten- tion to the characteristics of policy change which tend to maximize the probability of successful implementation in the context of countries like Tanzania. These are: (a) simplicity in terms of the technical or organizational innovation; (b) size of change, bearing in mind that incremental change reduces information required and minimizes risk of error; (c) limited participants- -changes requiring many actors and actions are more difficult than those requiring fewer participants; (d) clarity as to objectives and actions; (e) consistency; and (f) timeframe--the longer the time frame the more likely the change will be derailed; thus it is better to undertake long period change in small discrete bits. The Export Rehabilitation Credit and the more recent Multi-Sector Rehabili- tation Credits appear far from simple, require changes that are not incre- mental, involve too many measures and too many people, are sometimes unv- clear as to the precise action required, and actions required are in Pome cases continuous rather than discrete within a given time frame. In short, the design did not take full account of the constraints on capacity for policy reform. If the implied demand for the time of technocrats and high level officials to review policies and procedures, conduct studies, prepare policy papers, develop action plans were carefully considered, it would be obvious,that the Government would have to drop everything else in order to work on meeting the conditionality. 8.57 The upshot is that meeting conditions may be achieved at the ex- pense of other aspects of national economic management and/or without ade- quate participation by Tanzanian officials. Studies are farmed out to consultants and are quickly done, but the Tanzanians do not get to learn about their economy, nor to bring their insights to bear in designing ap- propriate solutions to their problems. The results and recommendations of these studies are unlikely to be well understood or to gain acceptance. The general impression one gets is that conditionality represents a large num- ber of policy changes which have to be rushed in order to fit into the desired time frame for disbursement. No provision is made for observing effects of some changes before committing to do others. The Bank should not underestimate the importance of adapting measures to the country's peculiar circumstances, its political and its social environment. This is a necessary counterpart to the Bank's knowledge regarding what might work, gleaned from cross section analysis of its large number of clients. Summary Analysis on Review of Lending 8.58 A look at the temporal aspects of Bank lending and the experience suggests that some periods were more favorable for successful operations than were others and may provide some guidance to the factors underlying the performance of the lending program. In most sectors the highest fail- ure rate for projects was in the mid-seventies. Thus after the successful first Education project approved in 1963 results deteriorated through the third and fourth (1973 and 1974) but improved slightly with the fifth (1976) and moreso the sixth (1979). Similarly in transport the apparent failures (projects with reestimated rates of return below 10%) occurred during 1971-75, with later projects showing some improvement. The worst projects in industry were during 1975-78. Agriculture failures spread over the decade of the seventies. There were some serial failures in the sense that follow-on projects also did not do well e.g. Toksuo, Cashewnut. 8.59 It has been suggested that one underlying factor was that the Bank failed to heed the obvious lessons from its lending experience. One such lesson was that Tanzania's absorptive capacity was being severely taxed by the rap id build-up of donor support for its investments in the early seven- ties.1l69 The Bank thus failed to confront the institutional constraints and the extreme demands on public sector institutions and skills inherent in the administration of a centrally planned public sector led and managed strategy of development. In short, predictable implementation problems were not avoided, either by a decision not to lend (or to postpone lending) or by placing more emphasis and resources on institutional and human devel- opment. As noted earlier, performance on these aspects was less successful than in physical developments. 170 Another lesson was that in the face of limited administrative capacity it was well nigh impossible to effectively coordinate and supervise complex multi-component projects, yet in edlication and agriculture some very complicated projects were approved. Similarly, even after several bad experiences projects which were too large for Tan- zania were approved. For instance, despite documented falling production trends, the Bank in 1978 approved a second cashewnut project, with the result that during 19,3-80 while raw nut production fell from 125,000 tons to 41,000 tons processing capacity rose form 27,000 tcn.s to 113,000 tons. 8.60 Part of the explanation of this failure to learn may be the lack of timely data on the impact of earlier projects; in which case increasing attention should have been given to monitoring arrangements to generate this data, 'b--t this was not cow- etely within the Bank's control and in a situation of general skills scar.Laty the allocation of capable personnel to produce statistics may not have been seen as a high priority to Tanzanians. (Until recently even the number and variety of motor vehicles was unknown.) Another part of the explanation may be that the Bank was overly optimistic about the pace at which institutional constraints could be relaxed and about the substitutability of technical assistance for local skills. Yet with regard to the latter, there were enough documented cases of Tanzania's reluctance to use technical assistance provisions in project loans to have dampened this optimismA. It may have been that in looking at the require- ments for its projects the Bank assigned lower priority to the use of edu- cated/skilled people to other areas e.g. political work, than the Tanzania Government was willing to do. 1W9 1978 Memo, Hansen, Res. Mission to Sandberg on Tanzania-Bank CPP, "One implication of Tanzania institutional capacity is that the Bank Jroup probes this capacity to the limit with six projects or so a year." "We should reconcile ourselves to this constraint and all it implies." "There are aozens of activities... .by Bank and other donors which add up to a major push on institutional capacity. JZOJ OED: Institutional Development in Africa: A Review of World Bank Experience. I 8.61 Part of the explanation for the high failure rate, and the persis- tently high levels of lending in spite of it, may have been pressure to lend. The pressure to lend could certainly explain the compressed apprais- al times noted in the audit for some projects e.g. the Tobacco Processing Project; the hurry to do follow-on projects before distilling the lessons of preceding ones e.g. RIDEPS; and the deviation of the time and attention of supervision missions to do project Identification and appraisal e.g. education projects. In interviews Bank staff and management are divided on whether there was pressure to lend during the seventies when most failed project loans were made. 8.62 Why was there pressure to lend? Bank files yield evidence that Bank desire for influence and leverage were part of the rationale for ex- pansion of lending to Tanzania as late as 1977. A 1974 memo on the CPP asked the question "Are we doing enough for Tanzania? ... could a consider- ably larger program, suitably concentrated geographically or sectorally, give us decisive influence over some areas of development where our ideas are better than those that guide the Government generally?" The Tanzania Strategy Paper of September 1977 stated "more attention must be paid to ensure that the lending program as a whole does transfer more resources--to provide policy leverage, as well as to promote growth." The same paper identified inadequate local cost funding as affecting project implementa- tion adversely, and went on to suggest that the Bank should perhaps consid- er financing a higher proportion of local costs. A further clue to this pressure to lend to Tanzania is to be found in a June 16, 1978 memo which states, "Given the Bank's commitment to increase resource transfers and the prospects for lending in many other African countries, Tanzania is likely to continue to have a large program unless there is a drastic change in political or economic conditions." This memo suggests that pressure to lend to Tanzania may have flowed, not only from an altruistic concern for its development but, from concern by the region to meet lending targets set in light of the Region's desired lending performance and the difficulty of lending to other countries. However it may have come about, pressure to lend to Tanzania seemed to have been responsible for at least some of the project failures due to poor and inadequate project design, oversized proj- ects where the Bank too readily acceded to Government requests for enlarge- ment, and undue haste to do follow-on projects. 8.63 Another explanation starts from the observation that sector pilicy environments were a factor in poor project performance and suggests that the Bank failed to understand the ideological/political, strategic, insti- tutional factors influencing the project primarily through the policy envi- ronment. There are two not mutually exclusive implications flowing from the above. First, had the Bank not failed to understand, it would and could have adjusted project design to compensate for the policy environment or opted to finance only those projects which were not sensitive to it; i.e. essentially avoid lending to the productive sectors. Second, the Bank should and could have influenced the project environment, if it had under- stood. Documentary evidence suggests that early in the 1970s thare were some in the Bank who were beginning to understand the importance of factors in the policy environment, and suggested limitation of lending to non-prob- lcmatic projects and that changes be sought through project conditionality. This was consistent with the project focus of the Bank. The persistence of this focus was precisely what delayed the development of a fuller under- standing and the acceptance by the Bank of the view that it ought to ques- tion whether the whole context ot its work in Tanzania was not counterpro- ductive. - 131 - AWK Page 1 of 8 A FRAMEWORK FOR ANALYSIS OF BANKfCOUNTRY RELATIONS Introduction 1. The purpose of a statement on methodology in a review of relations is to expose the rationale for the inclusion of, and a framework for inte- grating the essentially descriptive material which follows. It also pro- vides an opportunity for the reviewer to make explicit his assumptions regarding the link between various factors, and/or to specify the hypoth- eses suggested by preliminary examination of the information. The method- ology for the review of Bank/Country relat3ons is essentially built around four questions: i. What determines the nature of the relationship? ii. How and why does it change overtime? iii. How does the relationship affect development decisions? iv. How can the impacts be traced and the effectiveness of the rela- tionship be assessed? 2. The concept of a relation is complex and multi-faceted, making it difficult to analyze from a macro perspective. The usual approach to the review of Bank/Country relations is to identify selected issues and to analyze them; and approach akin to studying the human body by focussing on its parts. This approach, while useful, does not foster appreciation for the stractural and functional linkages between the parts, and does not throw much light on the relationship as a whole. This review is based on a simplifying analytical framework for integrating the essential components of the relation into a single picture or model. It can be used to organize the determinants of the relation into a small number of categorSes, and permits one to get a near visual interpretation of Bank strategy in the country. The Framework 3. Essentially, the framework is based on the recognition that the core of the Bank/Country relation is a transaction involving the provision by the Bank and the acceptance by the country of finance and advice for a consideration. This consideration is a price, and is amenable to analysis using the methods of price theory. Like the trade in any commodity, the amount and price of financing cum advice are assumed to be determined by demand and supply. However, because of the complex nature of the commod- ity, price and quantity have to be interpreted more flexibly than is ordi- narily the case. First the price of the package, financing cum advisory service, is assumed to be the sum of the prices of each component. The price of financing is usually expressed as a rate of interest, and is only - 132 - Page 2 of 8 specific to the member country to the extent that the blend of financing from IBRD and IDA is peculiar to it, since thir Bank sets a uniform rate for each type of financing. The price of Bank advice may be regarded as the loss in national sovereignty plus other costs involved in absorbing foreign advice. It should be possible to express this price in terms of the addi- tional rate of interest the country would be willing to pay at each level of borrowing from the Bank in order to have the net benefit of this advice. Second, the quantity of the package can be gauged by the amount of lending by the Bank, in the case of the simplest framework where it is assumed that the level of advice bears a fixed relationship to the amount of lending. 4. If we do not wish to assume a fixed relationship between lending and advice, then the amount of advice may be indicated by an index which would take into account the number of sectors in which the Bank gives ad- vice, and the range of issues and the extent of conditionality it wishes to impose in each. From the Bank's point of view it may wish to use man hours spent on advisory work including ESW as an indicator. From the country's point of view it could use an index based on the amount of time of their officials and political directorate appropriately weighted for level of responsibility. In such a situation a slightly more complicated framework is required since quantity of lending and advice could not be measured along the same axis. Since it is not intended to use the framework for quantitative analysis but for helping us to organize our thinking, the issues surrounding the measurement of price and quantity need not delay us at this point. 5. In the simplest framework we may represent the demand for the package as a relationship between quantity of financing in money terms (per period of time) and the interest rate the country would be willing to pay for that level of financing.(Figure 1) If we make the simplifying assump- tion that blend does not vary with level of financing then the supply curve viewed from the point of view of the Bank would simply indicate how much the Bank would be willing to lend; i.e., would be horizontal at the average rate of interest on that blend up to the lending limit and would become vertical at that point. If the Bank wishes to vary blend in some predict- able way, for instance getting harder the higher the level of lending, the supply curve will be upward sloping. In either case, from the country's viewpoint the supply price at each level of lending would be the interest on the financing plus an adjustment representing the net benefit from the associated Bank advice. This adjustment may or may not be positive depend- ing on whether the perceived benefit outweighs or not the loss in national sovereignty and other costs involved in absorbing foreign advice. At the intersection of demand and supply as perceived from the country's view- point, the transactional relationship will involve agreement regarding the level of lending (and the blend where this is variable) and the level of advice. 6. The study of the transaction requires examination of the factors which shift the underlying demand /supply curves for Bank financing and determine their elasticity, and those which influence the country's percep- tion of the net benefit of Bank advice. The demand for Bank financing will - 133 - Page 3 of 8 be determined by the member's national development goals and strategy (which will determine the expected marginal productivity of Bank financ- ing), and by the availability of other sources of supply. Perception of the net benefit of advice will depend on the degree of sensitivity to the intrusion of outside advice on national sovereignty, and on the country's estimate of its ability to productively absorb Bank advice. The supply of financing by the Bank to the country will depend on total resources avail- able to the Bank, demand for loans to other members, and the Banks view of the country's absorptive capacity. The level of advice associated with each level of lending will depend on how the Bank interprets its role in the development process generally, its strategy in the particular country, and its assumptions regarding the country's capacity and willingness to undertake policy reform. If it is assumed that the Bank as well as its members learn from experience with previous transactions, then the coun- try's assessment of the value and real cost of past Bank lending and advice very likely will influence present demand. Similarly, the Bank in design- ing advice attached to lending is likely to take into account previous experience with a country's performance especially in relation to agreed commitments. 7. However, the simple framework is not adequate to handle some rele- vant constraints and to examine the implications of changes in the mix of lending and advice. Another approach based on "indifference curves" can be helpful. First. it is assumed that the member country is trying to maxi- mize its sense .f national well-being, and that this depends partly on the expected performance of the economy and in turn on the level of Bank lend- ing to enhance performance; and partly on the extent to which the country can absorb useful policy advice without undue sacrifice of national sov- ereignty. Second, 't is assumed that the degree to which advice is likely to offend national sovereignty will vary directly with the amount of ad- vice. This is a simplifying assumption which may be modified as one at- tempts to make the analysis more realistic. Finally, it is assumed that the country can discriminate between combinations of lending and advice and can rank them according to whether or not the country prefers one combina- tion to another or is indifferent between them. It is assumed that the country will prefer combinations it associates with a higher level of na- tional well-being to those with which it associates a lower level of na- tional well-being. 8. Let us take a two dimensional space defined by a pair of axes--a perpendicular along which we measure "advice", and a horizontal along which we measure Bank lending.(Figure 2) These axes intersect at zero advice and zero lending. Into this space we map lines joining combinations of lending and advice about which the country is indifferent. On normal assumptions regarding country preferences we would expect the following picture to emerge: (a) For a given level of advice higher levels of lending will be asso- ciated with higher levels of national well-being up to a certain level of lending. Beyond this level more lending is associated with lower levels of national well-being and is not preferred to - 134 - Page 4 of 8 less lending. For various levels of advice these points will define a boundary which we call the absorptive capacity frontier, because it reflects the limit on the country's ability to convert Bank lending into expected additional economic benefit adequate to compensate for the cost of the financing. (b) For a given level of lending, more advice is associated with high- er levels of well-being, and will be preferred to less advice, up to a point beyond which more advice is associated with lower na- tional well-being and beyond which more advice is not preferred to less. These points define a boundary which we call the national sovereignty frontier. It is assumed that points above this fron- tier represent levels of advice which the country is not willing to absorb because of concern for national sovereignty. It may be noted that the analysis can take account of the constraint on the ability to undertake reform i.e., ability to absorb advice the country is willing to take, by defining a band of variable width (bounded above by the national sovereignty frontier) within which levels of advice are desirable but not absorbable. Neither frontier need be assumed to be a straight line and perpendicular to its respective axis; but for simplicity we can make this assumption. Note that if the national sovereignty frontier is upward sloping this is tanta- mount to suggesting that the country can be bribed with more lending to accept a level of advice it would not wish to accept at a lower level of lending. If advice is perceived as helping absorptive capacity then the absorptive capacity frontier will be upward sloping. See Figure 3. 9. The positive quadrant of the space (the area relevant for our attention) is therefore divided into four areas by the two frontiers de- fined above. There is a lower left area in which more lending and more advice makes the country feel better off. In the lower right area more lending makes the country feel worse off, and more advice makes the country feel better off; being an area of combinations outside absorptive capacity of lending but within the national sovereignty frontier. In the upper right area, containing combinations outside both frontiers, more lending and more advice make the country feel worse off. Finally, in the upper U left area, more lending makes the country feel better off because it has spare absorptive capacity, but more advice makes it feet worse off because it is offensive to national sovereignty. The intersection of these fron- tiers would be the combination of lending and advice associated with the highest level of national well-being from the relationship, in a static world.(NotE that if there are constraints on the capacity to absorb advice i.e., undertake policy reform, this point may not be attainable; in which case the effective maximum would lie lower down on the absorptive capacity frontier.) This is the point which the Bank should help the country to reach, if the Bank did not bring to the transaction its own preference concerning the mix of lending and advice and the amount of lending it wishes to supply. In a static world the problem in Bank management of its relation with the country is that it cannot know exactly where this point is located. It has to proceed by using certain indicators and its iudge- ment to try to locate the frontiers which define the point. 135 - Page 5 of 8 10. The Bank does bring to the transaction its own preferences as to mix of lending and advice, determived largely by its view of its role in development and of what is desirable for the country at a given point in time. This can be introduced into the framework in the form of a "Bank intervention function"- -simply a line connecting those combinations of lending and advice which the Bank would like to supply to the country at a given point in time. For simplicity this function is assumed to be linear and upward sloping--the Bank preferring to supply a higher level of advi- sory input at higher levels of lending. The slope of the line is assumed to be determined by the Bank's perception of its role in development. Thus when the Bank shifted toward Structural Adjustment it basically changed the slope of its intervention function in all countries because the shift has generally involved more advice per dollar of lending at the margin. The intercept of the intervention function is assumed to reflect the degree of Bank agreement with the general policy stance of the country. Disagreement would be reflected with a positive intercept with the lending axis, such that the Bank would only be willing to move from zero lending if the coun- try were willing to absorb a substantial amount of Bank advice. Substan- tial agreement on policy would mean that the Bank would not insist on the country absorbing any advice until after a certain positive level of lend- ing had been reached. Thus the intervention function would be expected to shift upward as the Bank became more dissatisfied with country policies, and to become steeper as the Bank's changing role dictated more advice per dollar. 11. At any given time, combinations beyond a certain point along th.i Bank's intervention function are not usually attainable, because of the limitation on availability of finance for lending to the particular coun- try. The availability of funds to the Bank, lending targets for the Re- gion, and the demand for Bank lending by other eligible regional members will be the main factors determining this limit. We assume that the trans- action will take place where the country can maximize its well-being sub- ject to the Bank's intervention function and lending constraint. It need not take place where the country is accepting all that the Bank is willing to lend. Also, it may take place where the country would have been willing to accept more Bank lending if it were available with the same marginal relationship between lending and advice, i.e., given the Bank's interven- tion function. 12. To represent a dynamic world, the framework would involve the assumption of an absorptive capacity frontier which would shift to the right in response to improvement in the country's capacity to identify, plan, and implement investment and operate the capacity efficiently. This last means that the availability of foreign exchange to purchase complementary imported inputs would be seen as shifting the frontier; to the left if there is scarcity of foreign exchange limiting the use of ca- pacity, and to the right if something happens to relax the foreign exchange constraint on imported inputs. As the country gains a better understanding of advice, it may come to regard it as having a higher net benefit after adjusting for national sovereignty loss and this would have the effect of shifting the national sovereignty frontier upward. A change in ideology - 136 - Page 6 of 8 and or a change in the political directorate toward greater openness to advice would have a similar effect on that frontier. Also as the ability to absorb desirable advice improves, the achievable maximum well-being point will move closer to the intersection to the two frontiers. 13. Bank management of the relationship in a dynamic world would be concerned not only with getting the mix of lending and advice as close to the achievable level of national well-being, but to move the frontiers farther away from the axes; thereby enlarging the area in which more lend- ing and more advice will make the country better off even if the constraint on lending does not allow the maximum point to be attained. The Bank can affect the absorptive capacity frontier by varying the composition of lend- ing and advice to provide technical assistance in project identification and implementation. Efforts to divert absorptive capacity from other lend- ers may increase country use of Bank lending but may not improve the level of national well-being attainable at the new level of lending over that attainable at the lower level. If the boundary of the capacity to absorb advice, i.e., undertake reform, lies below the national sovereignty fron- tier, the Bank may attempt to shift this upward through technical assis- tance specific for this purpose. 14. In the dynamic world, the Bank may be of the view that even at a given level of lending the country could be better off over time (have a higher expansion path for well-being), if it would accept and could absorb advice above its national sovereignty frontier. Since the country would associate this with lower present national well-being, the country is like- ly to reject the additional advice beyond the sovereignty frontier. The appropriate Bank strategy should include an increase in lending (implying additionality with conditionality), since the new mix is likely to be asso- ciated with a high sense of national well-being and there would be a better chance that the country would accept that level of advice; especially if the frontier is upward sloping in the relevant range. Note this means that in a dynamic world the intervention function would be determined not only by the Bank's role and its assessment of country policies, but also by strategic needs; which is to say an additional element of lending provided in order to influence the way in which the country adjusts its preference function over time. Indeed, the assumption of adjustment of the prefer- ence function resulting in lifting the national sovereignty frontier is crucial to the stubility of the relationship, since even with additional lending the country would still see itself as getting to a higher level of well-being by lowering the leval of advice, as long as it is above the frontier. Clearly part of Bank strategy would involve "education" to get the country to the view that future benefits of absorbing advice outweigh the present loss in sovereignty, which means shifting the frontier upward. 15. However, if the level of lending is outside the absorptive capac- ity frontier, the use of additional lending to get the country to accept more advice outside its national sovereignty frontier is not the appropri- ate strategy, since it involves trying to move the country to lower levels of well-being from lending as well as from advice. It may be better to restrict lending and concentrate other elements of strategy on shifting the Page 7 of 8 national sovereignty frontier upward. Sharp curtailment of lending is only indicated when the level is outside the absorptive capacity frontier, and the Bank wishes to get to a level of advice outside the national sover- eignty frontier via the additionality with conditionality route. But the effect of this strategy is predictably destabilizing since the country is forced to accept clearly inferior levels of well-being and has to negotiate its way back to preferred combinations of advice and lending. This is a feasibl6 approach for the Bank when alternate sources for lending are also cutting back. but it may delay the "education" process mentioned above. 16. This simple framework can be useful in guiding the selection of factors which should be studied in order to understand how a particular Bank/country relationship has developed. Because the Bank/country relation is complex and multi-dimensional, a simplifying framework can suggest a taxonomy for classifying information into a few broad classes, thereby reducing the number of dimensions and making the analysis more visible. In the simplest framework the taxonomy suggested is one which classifies the factors as those influencing the demand side or the supply side of the essential transaction which is at the core of the relation. In the subse- quent framework, phenomena are classified into: (i) those which influence the country's preference function for advice and lending, and affect the perceived locations of the absorptive capacity and national sovereignty frontiers; (ii) those which determine the Bank's intervention function and the lending constraint on it. Plainly this framework is not useful for predicting amounts of lending or advice that will be involved in the essen- tial transaction, but can assist in cataloguing information on a relation- ship and for making at least tentative judgements regarding the appropri- ateness of Bank strategy based on indications regarding the levels of lend- ing and advice and location of the frontiers of absorptive capacity and national sovereignty. 17. This framework is not useful for assessing effectiveness of Bank lending and advice. The effectiveness of the relationship will depend on the appropriateness of lending and of the dialogue, as well as on the effi- ciency of execution of these activities. But the rationality of the deci- sion processes for development and economic management will also affect the impact on output, the distribution of benefits, the sustainability of the benefits, and the vulnerability to destabilizing changes in the inter- national economic environment. Measurement of the overall impact of the relationship on country development is impossible. In the case of lending, the degree of overlapping among different sources in terms of the variety of investments supported and the interdependence among sources in determin- ing the impact on output, etc., makes it impossible to decompose effects and associate them with particular inputs. In the case of advice, the link- age between advice and decision is so blurred as to make it hazardous to ascribe any action to any advice. To assess effectiveness we must be satisfied with partial analysis of individual lending operations using indicators such as: economic rate of retur , achievement of physical tar- gets. caPacity utilization, financial viability of the relevant agency. imnrovement in institutions and increase in skills. and the extent of de- lays in proJect completion. The evaluation of the dialogue is even less n Page 8 of 8 amenable to assessment by analysis of the output attributable to it, hence the approach is to examine it from the input side and judge its potential for effectiveness with a rational interlocutor by the extent to which it meets stated desiderata for a good dialogue: planning- -issues, timing; execution- -the blend between education and pressure; and monitoring and review. Clearly, the metaod is not unexceptionable, but can be a useful way of gauging a relationship by focussing on the two main intervention variables through which it operates. FIGURE I R 5, S' St S' II Bank Lending $m. /year SS • Supply of Bank Lending, (blend fixed). S'S'Supply of Bank Lending,(blend fixed) as seen from country after taking account of the net value of associated advice. D DLow level of demand by country for Bank lending. D 2D2High level of demand by country for Bank lending. FIGURE 2 absorptive capacity Bank frontier Advice B A2 A3 national1 sovereignty frontier B B 3 A, Bl' 2 L 3 L L2 Bank Lending $mn./year B1 1= Bank intervention function, early 1970s. 2B2- Bank Intervention function, changed Bank role, more policy-based operations. B3 B3= Bank Intervention function, changed Bank role, dissatisfaction with country's policies and performance, early 1980s. - 141 - FIGURE 3 absorptive *capacity 3ank frontier Advice /B3 A., A3 - national 3soveregnty 5 frontier B 1 1 B3 3 B B2 2 L . L1 L2 Bank Lending $mn./year 1. = Upward sloping national sovereignty frontier - country is willing to trade off national sovereignty, i.e. accept more Rdvice for more lending. 2. = Upward sloping absorptive capacity frontier - country sees more advice as facilitating absorptive capacity for Bank lending. 3. = Constraint on capacity to undertake policy reform - country willing to accept advice but cannot undertake the associated reforms in this band. � _ _ _ _ _ _ _ _ _ iвд� �ае 't1GANOA � У��" � ' юиеы. л � � TAR , и ., ыиа.и ixoai� � исвиов 1 , ��� .JJ ,�каЧлсwЕ '� v4oca � �.г -_п ^ � � кЕиrд еиЛк�о тАе v, �г о .1- F _ � 1J Lд`' 1 4' : -_'' -' - \ � � 7 ,` �1. МUlЕдА м _ _ �1 WEST� г$' Ё ukER£WE4 `'► М�RA � �fJ N У А �ь'к1 '_� •� � (� +и5и .�..нw � R W А N о А � ��Е , � S=иEиGEii �% 1 �� ��' �\ S:VGkRFMЛ (`' \\ �1ин' � и� l 7 С 4о л , /) �\ S` � \� �1 д � ,г�� �AWAN2A `�-� � J � \ tr�T . j � i п о�пг � 4_ " 'г-� мw иzл м.лGи ...? 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