Structural adjustment, economic performance, and aid dependency in Tanzania

Tanzania embarked on a structural adjustment program in 1986 after a decade of protracted economic decline. Its program was supported by the International Monetary Fund and the World Bank and was accompanied by a substantial increase in foreign assistance. After seven years of adjustment the environment for higher economic growth has improved, but the results are only partially encouraging: economic growth has only slightly exceeded population growth, and officially measured domestic savings have deteriorated. Meanwhile, Tanzania's dependency on foreign assistance has increased, reflected in a deterioration of the current account of the balance of payments. This has led to an increasingly heated debate about whether real adjustment is in fact taking place in Tanzania, or whether foreign aid has served to postpone adjustment instead of supporting it. The authors shed light on the relationship between adjustment and aid dependency on the basis of Tanzania's experience. Tanzania's weak database is adjusted in several respects to correct for the most glaring deficiencies in it. After adjustment of the database, Tanzania's performance is compared in the period 1981-85, prior to when reforms were launched, with that in the period 1986-90, which followed the launch of the Economic Recovery Program in 1986. To put the Tanzanian experience in context, its performance is also compared with that of four sub-Saharan African countries - Ghana, Kenya, Malawi, and Uganda - which embarked on similar reform programs during the 1980s. The adjustment of the macroeconomic data shows that, contrary to traditional interpretation, Tanzania's increased dependency of foreign assistance did not lead to a deterioration in domestic savings performance. Most of the foreign assistance was used for investment rather than for consumption. But the principal difference between Tanzania and the four sub-Saharan African countries sampled was the efficiency with which the foreign assistance was used. Using a measure of macroeconomic return on investment, the comparison shows that Tanzania is getting very little return on domestic investment even after the introduction of structural reforms. There are several reasons for this, including the dominance of the Tanzania economy by a large and highly inefficient parastatal sector. If Tanzania is to generate the accelerated growth that it so urgently needs, one of the key areas of policy reform needs to be the increase in productivity of domestic investment.