Economic strategy and structural adjustment in Tanzania

152S(4 PSD Occasional Paper No. 18 September 1995 8 > Economic Strategy and Structural Adjustment in Tanzania Brian Van Arkadie I R I The World Bank Private Sector Development Department   Private Sector Development Department Occasional Paper No. 18 Economic Strategy and Structural Adjustment in Tanzania Brian Van Arkadie October 1995 This paper has been cleared for inclusion in the occasional paper series by R. Shyam Khemani, Manager, Competition & Strategy. The views expressed are those of the author(s) and should not be attributed to the World Bank. This paper forms part of a forthcoming volume, Leila Frischtak and Izak Atiyas (eds.), "Govemance, Leadership and Communication: Building Constituencies for Economic Reform." The World Bank Private Sector Development Department  ii  Contents 1. Origin of the Economic Crisis ..................................................... 1 Radical Change Following Independence .............................................................. I The Agricultural Institutional Environment ............................................................ 5 1973: The First Economic Crisis and the Response ............................................... 7 1979: The Second Economic Crisis ..................................................... ......... 8 Governance and the Managed Economy .............................................................. 10 2. The Politics of Reform: Economic Disequilibrium as a Source of Change ..................................................... 15 3. The Reform Process .................. ................................... 23 Resistance to Change and First Steps to Reform: 1979-84 .......................... 23 Resistance to Exchange Rate Adjustment ..................................................... 25 The Reform Process: 1984-93 ........................................................ 28 The Slow Pace of Parastatal Reform ........................................................ 31 4. The Distributional Impact of Reform .............................................. 35 5. Sustainability of the Reform Process ............................................ 39 The Momentum of Economic Growth ........................................................ 39 The Managerial Capacity of the State ........................................................ 41 6. The Role of Donors ..................................................... 45 7. A National Vision of Development? ............................................... 51 Bibliography ..55 iii  Al  Origins of the Economic Crisis Radical Change Following Independence 1.1 In Tanzania, the need for structural adjustment in the 1980s had its origins in both the negative events in the international economy and the failure to adjust policies swiftly enough in response to the initial shocks. In many respects, the evolution of the Tanzanian economy since independence and the events that led to structural adjustment are quite similar to those experienced by many other African countries. Another, and perhaps more interesting, part of the story is more particular to Tanzania: the crisis in the national model of development that had incorporated the vision of the charismatic independence leader, Julius Nyerere. That crisis was brought to a head by exogenous shocks. Whether the system would have sustained itself in more propitious external circumstances is a matter for historical speculation, but faced with deep crisis, reform was unavoidable.' 1.2 The economic reform process, as it came to be understood in the Tanzanian context in the 1980s, had four main elements: (1) stabilization, through the use of orthodox macroeconomic policy instruments to restore macroeconomic balance, both domestic and external; (2) liberalization, reducing bureaucratic controls and government allocation of resources, and opening areas of the economy to private business that had been public sector monopolies; (3) reform of stale enterprise and privatization; and (4) reform of the government itself to enhance government capacity. 1.3 Some of the policy issues on the reform agenda, particularly in relation to stabilization, could be seen as more generally technical in character (although even issues such as the exchange rate, which are sometimes considered entirely technical matters, had strong political implications). Many of the policy issues, however, had obvious ideological content, particularly those related to liberalization and privatization, because they implied dismantling the system created following the Arusha Declaration. I In an early conmnent (Van Arkadie 1983) on structural adjustment in Tanzania, I argued that the evident need for stabilization and some institutional reform should not be used as leverage to enforce dismantling of the existing economic system. In retrospect, although I remain critical of some aspects of the structural adjustment orthodoxy of that period, I recognize that I underestimated the depth of the malaise in the Tanzanian system at that time.  2 Economic Strategy and Structural Adjustment in Tanzania 1.4 The Arusha Declaration, issued by the ruling party, the African National Union (TANU, later renamed CCM), in February 1967, engendered international approval because of its emphasis on the priority attached to rural development, its rhetoric of self-reliant development, and its commitment to egalitarian economic and social policies. The Arusha Declaration seemed to incorporate a clear vision of Tanzanian development, which was implemented with great vigor by a charismatic and honest leader. The argument in the declaration was that self-reliance and egalitarianism could be best achieved by combining a leading role for the state in all large-scale activities with the promotion of rural development through cooperative agriculture (rural development based on the principles of "Ujamaa"). 1.5 With its emphasis on rural development and concern for the broad spread of the benefits of economic growth (in essence an early espousal of what later became known as a "basic needs" approach), important parts of the Arusha vision seem as valid today at they did in 1967. It is of some interest, therefore, to consider whether the economic difficulties that engulfed the Tanzanian economy demonstrated the fundamental unsoundness of the Arusha vision-its impracticality despite its Utopian attractions-or whether the problem lay in the faulty implementation of basically sound ideas. In the contemporary Tanzanian political debate, both explanations receive support. 1.6 One important element in the evaluation of the Arusha vision depends on interpretation of the degree of consistency between policies implemented and intentions, as stated in the declaration. Particularly in the period beginning in 1972, policies were implemented that arguably were inconsistent with the positions developed in the Arusha Declaration. The formulation of the Basic Industrial Strategy involved a definite shift from the priority given to rural development in the declaration. There was increasing centralization of economic authority and urgency in the implementation of programs. The attempt to enforce the villagization ("Ujamaa Villages") program over two years, the abolition of cooperatives and local government, and the commitment to achieve universal primary education in two years all reflected an impatience to achieve political goals swiftly, even if it meant the loss of the principle of decentralized participatory rural development associated with the Arusha Declaration rhetoric and downplaying realism in the implementation of policies. At the same time, the emphasis on the ascendancy of politics-and politicians-over the bureaucracy and workers' participation in the management of state enterprise seemed to incorporate a heightened political radicalism, although at the expense of weakening the self-confidence and role of technocrats. 1.7 The reasons for the heightened radicalism in the 1970s are not entirely clear, and cannot be established in this chapter. One possible explanation is that most of the policy criticism came from the intellectual left.2 Nevertheless, it is unclear how much support the left-which 2 This was the view developed by N. Lipumba in commenting on an earlier draft of this chapter. He was in Tanzania at the time, and places emphasis on the influence of the 'left critique in raising the ideological content of Tanzanian politics and contributing to the gap that he sees as emerging between policy intentions, as set out in the Arusha Declaration, and practice, as implemented in the period from 1972 to the mid-1970s. While there was  Origins of the Economic Crisis 3 argues, for example, in favor of the basic industrial policy-could summon. President Nyerere seemed able to ignore or contain criticism from intellectuals with little difficulty. The explanation for the period of heightened ideology probably lies in the evolution of the thinking of Nyerere himself, who exhibited an increasing impatience with technocratic conservatism and a belief in the need to accelerate the development process. Aspects of the extension of state control also had a more pragmatic element, in that it reflected an effort to defend established priorities in the face of the economic crisis of 1973. By the mnid-1970s the degree of state intervention and central economic control had gone well beyond that envisaged at the time of the Arusha Declaration. 1.8 Insofar as a quasi-planned socialist economy was created, economic reform involved not merely a technical change in economic policies, but also a more thorough change in the economic and social system. The transformation was not equal to those of Eastern Europe and the Commonwealth of Independent States (CIS), because Tanzania had remained a mixed economy, but it did imply fundamental institutional change. Economic reform in Tanzania was therefore more intensely political than the customary reform process-it involved comprehensive change in economic institutions, and eventually in political institutions as well. 1.9 The need for reform was evident at the beginning of the 1980s, when the economy was faced with a deep crisis. The immediate symptoms were an extreme shortage of commodities, the result of a crippling shortage of foreign exchange, which in turn reflected such long-term phenomena as stagnation in export crop production, excessive dependence on donor support, and low productivity of the public sector investment programs in industry and infrastructure. 1.10 The economic system facing the crisis had been created following independence, which had brought economic policy change in four major areas. The growth in public spending accelerated, not merely in response to the ambitions of the new government, but also because two other developments made it possible to translate ambition into practice. Development aid broke the link between domestic savings and investment and funded development spending with too little regard for the recurrent resource base to sustain the expanded activities. In addition, the monetary restraints of the colonial financial system were ended as the colonial Currency Board gave way to the new Central Bank, allowing for monetary and fiscal flexibility and a break in the link to sterling. * There was a decisive shift in control over the economy. Change was initially concentrated in the staffing of the public service. The rapid localization of the such a debate-involving, for example, intellectuals at the university-it is difficult to judge how far polemics affected government decisionmaking. By and large, Nyerere seems to have been fairly impervious to such influences. The alternative explanation may be sought in the character of Nyerere himself, who had become increasingly confident of his capacity to override technical arguments suggesting caution, as he had done successfully in the initial implementation of the Arusha Declaration, and at the same time placed increasing faith in the potential for using the party for mass political mobilization to accelerate development.  4 Economic Strategy and Structural Adjustnent in Tanzania bureaucracy was one of the first priorities of the new government. But with independence, a lack of congruence emerged between political and economic power. It was no longer acceptable for Africans to be limited to the roles of peasant and worker. Either expanded public ownership or public support for the transfer of wealth to an emerging African property-owning class (as in Kenya) inevitably appeared on the political agenda; in Tanzania, this issue was confronted in 1967 in the Arusha Declaration. * There was an impressive expansion in social service provision in the early 1960s, and the Second Five-Year Plan (1969-74) set out a strategy similar to what some years later became known in the donor world as "basic needs." * The fourth, and least desirable, change was the expansion of military expenditure. Tanzania was neither militaristic nor aggressive, but sovereignty had implications for necessary military spending. The imperial regime enjoyed economies of scale because of its ability to move forces from colony to colony, an efficiency lost as each newly independent country faced the need to form a national army. 3 1.11 Despite the greater short-term fiscal and monetary flexibility gained by the replacement of the Currency Board by the Bank of Tanzania, over the long term the real resources available to government from domestic sources were constrained by the growth of export earnings, which in turn were affected by the vagaries of international markets, technology in the primary production sector, and the incentives provided to farmers. In the 1970s, the combination of ambitious fiscal expansion and the costs of the expansion of the public sector placed an increasingly heavy burden on the export sector. As the budget expanded and the single-channel (monopoly) marketing system became increasingly expensive, the export sector was squeezed, and export production faltered. 1.12 Although the First (1964-69) and Second (1969-74) Five-Year Plans were intended to diversify the economy, and the Basic Industrial Strategy, devised during the Second Plan period, aimed to accelerate the pace of industrialization, industrial investment failed to generate either much export diversification or real import substitution. Import dependence was not reduced, and industrialization through import substitution effectively increased structural dependence on imports by encouraging the creation of industries that could only operate with imported inputs. At the same time, the donor-financed projects crucial to development had extremely low average productivity. As declining export performance and negative shifts in international terms of trade reduced foreign exchange earnings, the initial response was to attempt to defend the resources at the disposal of the state and its functionaries. 3 In Tanzania, the problem of managing the army was thrown into sharp focus when the army mutinied in January 1964. Later expansion in the army is in part to be explained by instability in neighboring countries, which eventually led to the Kagera (Idi Amin) War with Uganda, 1978-79.  Origins of the Economic Crisis 5 The Agricultural Institutional Environment 1.13 Crucial to a consideration of the origins of the Tanzanian crisis and the need for reform is the institutional structure conditioning agricultural perforrnance. Despite the extension of public ownership after the Arusha Declaration to include most large-scale economic activity, the bulk of the population remained outside the state sector, living and working on smallholdings; the typical unit of production remained the household.' 1.14 Given the dominance of smallholder farming, policies toward agricultural marketing were the most important government influence on agricultural performance. The postindependence policy had been to promote single-channel marketing through a chain running from the primary cooperative, to the cooperative union, to a marketing board, with monopoly enforced at each stage. The effort to extend the cooperatives beyond the areas where they had thrived as voluntary institutions to become a universal, but imposed, marketing mechanism had created an inefficient system (in 1966, it had already proved necessary to convene a presidential commission of inquiry into the cooperative system). Moreover, where the cooperatives had flourished before independence-such as the coffee- and cotton-growing regions-they posed a political dilemma as an alternative to the party as a focus of local political power.' The solution adopted in 1973 was to abolish the cooperatives and to amalgamate the local marketing functions, the previous activities of the marketing boards, and some of the extension responsibilities of the Ministry of Agriculture under newly created crop authorities. These large monopolies were unable to deliver what was expected of them, and their inefficiency became a prime cause of the deterioration in agricultural incentives,6 despite subsidization of loss-making crop authorities, which became a heavy budgetary burden. 1.15 Another aspect of institutional policy that commanded international attention was the Ujamaa Village program. When the Second Five-Year Plan was published in 1969, a commitment was made to extend the principles of Ujamaa (Nyerere's vision of socialism) throughout the countryside by promoting Ujamaa Villages.7 The villagization program, implemented in 1973-76, 4 In the early 1960s, about half of export production (most notably cotton, cashews, robusta coffee, and a significant proportion of arabica) and the lion's share of food was produced on smallholdings (see Van Arkadie and Ghai 1969). 5 It could be argued that there was a basic political contradiction in the rural development strategy of government. The rhetoric tended to emphasize a decentralized and voluntary ideology of rural development, an aspect of Nyerere's thought that added to its international appeal. If genuinely spontaneous local institutions developed, however, they were likely to be identified as a threat to the authority of the party, as was the case with the Ruvuma Development Association, which seemed at the time to be implementing the Nyerere philosophy, but was nevertheless abolished. 6 The burden on farmers resulting from the inefficiency of the crop authorities was initially documented in a series of studies by Frank Ellis, Economic Research Bureau, University of Dar es Salaam. 7 The Ujamaa Village was probably Nyerere's most famous innovation, and also his greatest failure. There is not the space here to commnent on that experience, except to note the great gap between the initial  6 Economic Strategy and Structural Adjustment in Tanzania sought to transform the pattern of rural settlement by congregating the rural population-which previously had been resident predominantly on dispersed family smallholdings-in nucleated villages of sufficient size to be efficient (in bureaucratic terms) units for the delivery of services. Involved in this plan was the idea that the new villages could also become the basis for a socialist system of production. 1.16 The program was massive, although not universal, in extent.' The effect of the program on production remains unclear. There must have been considerable short-term disruption, because production areas were lost and energies were diverted to building the new villages. In some areas, villagization created an increased risk of environmental degradation. Nevertheless, the only case widely 1presented to demonstrate large, long-term output losses from villagization is that of cashew nuts. Even if it is not possible to establish that villagization had a strong negative effect of production, however, it certainly diverted energies from activities that could have enhanced productivity. Little was achieved in the nature of socialist production, and although there was a substantial effort to extend social services in the rural areas, much of the progress at the village level was eroded during the subsequent economic difficulties.'