Structural Adjustment, Economic Performance, and Aid Dependency in Tanzania


WP/93/66-EA

Structural Adjustment, Economic Performance,
and Aid Dependency in Tanzania by Roger Nord,
Michael Mered, Nisha Agrawal, and Zafar Ahmed

After experiencing a decade of protracted economic decline, Tanzania
embarked on structural adjustment in 1986. Its program was supported by
the IMF and the World Bank, and was accompanied by substantial foreign
assistance. Although after seven years, the environment for higher economic
growth has improved, 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, which has led to a deterioration of the
current account of the balance of payments. This development has given rise
to an increasingly heated debate about whether real adjustment is taking
place in Tanzania or whether foreign aid is postponing rather than
supporting adjustment.

The purpose of this paper is to shed new light on the relationship
between adjustment and aid dependency on the basis of Tanzania's experience.
To this end, Tanzania's data base, adjusted to correct for glaring
deficiencies, is used to compare Tanzania's performance in 1981-85, before
reforms were launched, with its performance after the Economic Recovery
Program was launched in 1986. The adjustment of the macroeconomic data
shows that, contrary to traditional interpretation, Tanzania's increased
dependency on foreign assistance did not lead to a deterioration in domestic
savings performance. Furthermore, most of the foreign assistance was used
for investment rather than for consumption.

To provide a context, Tanzania's performance is compared with that of
four other sub-Saharan African countries (Ghana, Kenya, Malawi, and Uganda)
that embarked on similar reform programs during the 1980s. The principal
difference between Tanzania and these four countries, however, is the
efficiency with which these countries used the foreign assistance. The
comparison shows that, even after introducing structural reforms, Tanzania
is getting very little return on domestic investment, in part because the
economy is dominated 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 goals of its policy reform must be to increase the
productivity of domestic investment.