Policy Brief 2: Why is Tanzania Poor?

(Policy Brief # 2 Submitted December 6th 2007, for Econ 346 - Economic Development, Lafayette College)

Over the course of the 20th century, Tanzania experienced a multitude of social, political and economic changes. It still remains poor today. The WorldBank classifies a ‘low income country’ – such as Tanzania – as one with a Gross National Income per capita of $905 or less (WorldBank Data 2006). As of 1992, Tanzania’s per capita income was recorded at $110, and average per capita consumption was $0.5 per day (OECD 2000).

Several possible factors have been blamed for contributing to current hardships, such as Julius Nyerere’s failed attempts to collectivize agriculture between 1961 and 1975 through his socialist Ujamaa policies as the first president of Tanzania (Pratt 1980). While pre-independence plans “focused on the commercialization of agriculture and the creation of industries that could reduce the need for a variety of imports”, post-independence interventions by the Government, especially in agriculture, proved damaging: Only 23% of the volume of 1967 sisal exports were being exported in 1980. Exports of cashew nuts were down to 49% in 1980 of their original 1967 volumes. (Sahn and Sarris 1994).

Another factor contributing to current hardships in Tanzania is its involvement in and use of resources for expelling Ugandan dictator Idi Amin in the late 1970s. Furthermore, in 1997 The Vice President of Tanzania blamed the loss of economies of scale due to the breakdown of the East African Community (NPES 1997[1]).

In truth, however, history should not be blamed as the only reason for the current situation, nor can it be changed. Instead, identifying and improving current causal factors should be focused on more. There is strong evidence suggesting that Tanzania is poor because first, it lacks a solid system of government regulation; second, the country experiences severe credit market failures; and thirdly, the development of human capital is alarmingly weak.

The first major reason for Tanzania being poor is the lack of efficient government regulation (NPES 1997). Without a solid framework for legal and social infrastructures, it is not realistic for the government to be able to execute its policies effectively. Moreover, systems of accountability are relatively weak in Tanzania. This is partly due to the lack of records and infrastructures for permanent residential addresses, which is highlighted in the next section of this paper. Accountability contributes to the motivation of the government to perform well and lack of such can undermine their efforts to create conditions suitable for poverty eradication and sustainable development. The government is not able to allocate resources efficiently, since it does not act on the immediate needs that are apparent from the private sector, and on the provision of public goods such as healthcare and transport (Gumbo 2007).

A major strand in the poor regulation by the Tanzanian government is corruption. The current President Jakaya Kikwete and Former President Benjamin Mkapa made distinct efforts to investigate and alleviate corruption within the government. The National Framework on Good Governance, written in the late 1990s by Tanzanian authorities aimed at a “transparent, responsive and accountable” governance system (REPOA 2006[2]). While these movements towards cleansing the government of corruption are important, the incentive to see through the successful execution of policies is just as significant. Cutting down widespread corruption ensures that the government is able to better allocate resources to accumulate labor and tangible capital. In addition, such a focus encourages a solid system of hierarchy and trust, which in turn builds intangible capital.

The existence of credit market failures is the second major reason for Tanzania being poor. This is closely related to the absence of a strong legal structure, as emphasized in the previous section. While loans are given from banks and other financial institutions, citizens often lack the collateral to back their loans up (Stifel - lecture 2007). In addition, residential infrastructures have been designed on an ‘ad-hoc’ basis, which means that addresses registered with the city counsel are almost always outdated or simply false (Lugalla 1997). Furthermore, because of the lack of an efficient legal system, there is often little incentive to repay loans (Ray 1998). A credit market cannot exist in a society where an individual cannot be tracked down to compensate their credit allowances. Finally, high transaction costs due to lacking infrastructures make it increasingly difficult and in many cases not affordable for the rural population to have access to credit, which thus limits their ability to participate in the economy by expanding production beyond subsistence-level (Stifel – lecture 2007). In short, these factors bring about country-wide credit market failures, which stagnate the Tanzanian economy.

Probably the most significant implication of this weak credit market is its effect on Tanzania’s agricultural sector development (Dugger 2007). Specifically, the market for fixed capital, which is vital to processing agricultural goods, is not as easily accessible as it would be if farmers could efficiently use credit (Ray 1998). To make matters worse, investment in the agricultural sector has declined since 1980, after Nyerere’s collectivization policies were seen as failures (Pratt 1980). As a result, foreign aid towards agriculture has dropped because “African governments have too often spent less of that wealth than they might have on rural development” (Dugger 2007). Hence, credit market failures not only affect industries and formal businesses in capitals, but they affect rural areas even more severely. And considering that Tanzania, like many other Sub-Saharan African countries, depends primarily on agricultural goods to feed its people and for exports, this is a serious cause for concern and should be one of the main policy-targets when addressing poverty.

The final reason for poverty in Tanzania is the slow and insufficient development of human capital. There is a great need for high quality expertise from education to provide technical assistance to the projects endorsed by the Tanzanian government or through Structural Adjustment Policies. Increasing the number of teachers in rural schools and qualified professors in higher learning institutions are some examples of this expertise. Furthermore, the need for the development of human capital appears to be a great opportunity for social entrepreneurs who focus on creative and sustainable solutions to current problems, which would otherwise be slowed by bureaucratic processes of government procedures (Easterly – interview 2007). A famous example of how human capital can be developed through the private sector is the concept of microfinance, which in turn, stimulates further entrepreneurship from the poor. In addition, Tanzania has more labor than capital, so there should be increased focus on developing labor-intensive production, so that more jobs are created and there is greater incentive for people to become economically active such that they are capable of pulling themselves out of poverty. Given these reasons, the need for efficient development of human capital is urgent in Tanzania.

To better understand this idea, one should examine the reasons for poor building of human capital in Tanzania, among which is the unequal access to education. According to a survey conducted by the Organization for Economic Co-operation and Development (OECD) in 1991, the percentage distribution of employment resulting from graduates of higher education was only 1% in urban areas in Tanzania. Secondary school graduates were recorded at 9%, while primary school leavers were at 53.4%. This means that 34.1% of those employed in urban areas had no educational background whatsoever, as of 1991. The connection between the lack of access to education (more so in rural areas) and unemployment is evident from survey data, which shows that formal employment makes up less than 10% of the labor market (OECD 2000). Thus, Tanzania continues to be poor: While government regulation is weak and legal infrastructures are not being improved, the credit market continues to be inaccessible, and human capital remains low due to the low provision of and low access to education.

In conclusion, it is important to note that according to most sources used in this paper, Tanzania stands out as a very motivated African country, dedicated to poverty alleviation. In fact, through the NEPS paper, the government has made it a mandate to completely rid the country of poverty by 2025 (NEPS 1997). However, current data and WorldBank evaluations do not provide optimistic evidence for these expected developments, but this further highlights the importance of identifying the main reasons that hold Tanzania back from reducing poverty: Poor government regulation, the absence or lack of access to formal credit markets, and the poor quality of human capital development collectively pull back the attempts for poverty eradication and achieving higher growth rates. Therefore, future policy efforts should focus on these problems, which – once solved – have the potential to create a better economic outlook for individuals to make healthier rational choices in order to progress.

Endote: A full Works Cited document can be obtained from me via e-mail.

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[1] NPES stands for the National Poverty Eradication Strategy, drafted by Tanzanian authorities, in 1997.

[2] REPOA stands for Research on Poverty Alleviation