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.