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Tanzania’s donor-led experiment is going woefully wrong

By Ghalib Jafferji
Posted on Monday, 30 November 2009 09:56

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With the perception that corruption in Tanzania is getting worse rather than better, there is concern that recent government denunciations of corruption amount to little more than window-dressing and Tanzania recently fell 24 places in Transparency International’s 2009 Corruption Perceptions Index. But donor governments are beginning to insist on greater transparency and effectiveness of public spending for poverty reduction.

Here, development economist Ghalib Jafferji analyses how corruption is undermining Tanzania’s efforts to achieve long-term development goals, because it hinders the economic shift from consumption to investment.

Despite all the pretence of multiparty democracy, a free press, the economic liberalisation and the political noise in the Tanzanian parliament on questions about the Bank of Tanzania’s external payments scandal, the fundamentals of what is happening in Tanzania remain damning. Despite huge injections of foreign aid over the past two decades, there has been no significant reduction in poverty since 1991.

It appears that two paradoxical bedfellows, international aid and gold, are fuelling Tanzania’s ‘Dutch disease’. In 2008, gold exports accounted for 30% of Tanzania’s export earnings and international aid financed about 34% of the 2008/9 budget. As a consequence, the country is experiencing several contrasting phenomena at one and the same time: a surging corruption problem, an exchange rate that is stronger than is good for the real economy, no significant reduction in poverty, a booming property market, a moribund agricultural sector (where 75 % of the population make their living), and a political elite which is responsible for rising corruption but appears incapable of reforming itself.

In the years since its economic liberalisation began, Tanzania has been repeatedly rocked by very high-level corruption scandals: examples include the Bank of Tanzania’s External Payments Arrears (EPA) scandal and Twin Towers debacle, a defence contract awarded to BAE Systems, the Richmond power-generation scandal, and non-payment of corporation tax from mining operations.

These scandals have involved billions of Tanzanian shillings and together are large enough to be measured in percentages of GDP. They link some of the most senior politicians, ruling party officials and local businessmen in the country with international facilitators. One minister, when asked by a local newspaper about his $1.5m in an overseas bank account, described the money as “loose change”.

Few grumble in a country awash with corruption

The corruption goes all the way through the system. The next layer down involves routine corruption in the lucrative Dar es Salaam property scene, where developers are able to acquire licences to construct high-rise buildings. Through the connivance of national housing corporation officials, people living in existing properties are forced to leave their residences without any compensation. The new flats sell for up to $250,000, representing up to 600 times the per capita income. Dar es Salaam is awash with such construction.

Then there are scams conducted in government procurement and construction. In 2008, Norwegian consultancy Norconsult decided that it would “no longer bid for contracts managed by local authorities in Tanzania due to widespread corruption”.

Petty corruption has been refined into a systematic extortion racket. For example, in certain parts of Dar es Salaam, such as Salender Bridge crossroads (a bottleneck that drivers cannot avoid), traffic police have established an extortion racket, pulling drivers in for little reason. Tanzania’s law enforcement system, it seems, cannot be relied upon to act with impartiality without corrupt payments.

Along the way, Tanzanians have become tolerant of it. Few complain officially; some grumble and pay, others dangle incentives. As the economy has grown and the amount of money flowing through the country has increased, so has corruption. As economic agents make more money, the more they are prepared to pay and are expected to pay.

The failure of the government to take credible action is reflected in Transparency International’s just-published 2009 Corruption Perceptions Index (CPI), where Tanzania has fallen 24 places to stand at 126 in the list of 180 countries. The index confirms the illusory nature of recent reported improvements in Tanzania, even if the country still stands some places higher than neighbouring Uganda and Kenya.

The donor government coordinator in Tanzania, Pieter Dorst, cites the latest CPI as evidence that corruption is “getting worse rather than better” and argues that Tanzanians deserve to have confidence that resources are being used to advance their welfare rather than being lost through corruption.

The truth is that aid is not benefitting the poorest as much as intended. While Tanzania’s GDP has almost doubled and per capita income has increased by more than a third since the early 1990s, there has been no significant reduction in poverty. When compared to other countries that have managed similar rapid economic growth such as Ghana, India, Vietnam and Uganda, Tanzania has been the least successful in reducing poverty.

Economic growth has been narrowly based on mining, tourism and construction. The stronger-than-expected exchange rate has been instrumental in suppressing the incomes that could arise from exports. Three-quarters of Tanzanians have not been able to benefit from the opportunities arising from trade liberalisation because they live in rural areas, and agricultural production and exports have not increased by as much as the rest of the economy.

Specific aspects of economic policy such as a strong exchange rate (which tends to make imports more financially-attractive compared to exports), and the re-introduction of agricultural marketing boards in the case of the crops cashew nuts and coffee, appear to have suppressed incomes and hence consumption. Farmers now get a lower proportion of world prices than ever before owing to the inefficiencies of these agricultural marketing boards.

Aid has fuelled corruption

Tanzanians remain amongst some of the poorest people in the world. The country is far off the mark in meeting its target of halving poverty by 2015, set out in its poverty reduction vision. The boom in gold exports and the inflow of aid have together helped Tanzania tolerate much higher levels of imports and trade deficits, fuelling consumption and asset price inflation far beyond the level of economic development and productive capacity than it otherwise could. Such levels of importation and asset prices are unsustainable for long without a rapid supply-side response, requiring a significant shift in resources from consumption to investment. This is not as yet apparent.

Instead of the intended outcomes, the flow of aid appears to have fuelled corruption and given the corrupt more opportunities – raising the important question of what happens to the resources that have been corruptly extracted. In most African countries they are assumed to be stored abroad, whilst in Asian countries the resources are reinvested in the country. However, with Tanzania’s law enforcement institutions rated so poorly, there is little chance of the problem being addressed in the near future. So far the Tanzanian example reconfirms the view that aid taxes the poor in the developed countries to fill the pockets of the rich in poor countries. There must be a better way.

The economics of development is no longer rocket science. Many previously-poor countries have made exceptional breakthroughs in the last few decades. Look at China, India, Malaysia, Indonesia, Taiwan, South Korea in Asia; while in Africa, Ghana and Botswana have managed to deliver reductions in poverty as well as economic growth. These have been based on export-led growth with highly-competitive exchange rates.

Without the political will to deliver from the very top, Tanzania’s donor-led experiment seems to be going woefully wrong. Tanzanians should ask themselves: What will happen if the supply-side response is not forthcoming and the benevolent mood amongst the donors eventually turns sour?

Ghalib Jafferji is a Tanzanian-born development economist

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