The Heritage Foundation

Backgrounder #866 on Middle East

November 14, 1991

November 14, 1991 | Backgrounder on Middle East

Tanzania's Travail: Lessons in Improving American Aid to the ThirdWorld

(Archived document, may contain errors)

866 November 14,1991 TANZANIAS. TRAVm LESSONS IN IMPROVING AMERICAN AID TO THE THIRD WORLD INTRODU CTION Africas once promising post-colonial era has proven to be a time of economic despair, with conditions in the vast majority of African countries today as bad, if not worse, than ever befare. This is the case with eastem Africas United Republic of Tan zania. Although rich in natural resources and inhabited by an industrious people, Tanzania nonetheless has the dubious distinction of having one of the worlds lowest per capita incomes.

The blame for Tanzanias poverty must rest, as it does for all countrie s, onTan zania itself. Yet blame also must be shared by the Western nations and multilateral financial institutions such as the World Bank and the International Monetary Fund IMF) that have pod vast sums of money intoTanzania accompanied by equal ly vast q uantities of bad advice and bad policies. The United States, as an aid donor toTanzania and supporter of the World Bank and IMF, cannot escape blame. The mare than $500 million that the U.S. has given toTanzania since its in dependence in 1961 ~flects Ame r ican generosity. This money, however, has been Aid Paradigm. If there is any Virtue to the travail of Tanzania it may be as a lesson in what the U.S. should and should not do with foreign aid. As one of the worlds largest per capita recipients of foreign e conomic aid,Tanzania is a paradigm writ large. This paradigm teaches that economic aid will be wasted and actually contribute to impoverishing people unless the recipient is committed fm ly to a market economy. Only market economies effectively can use fo reign aid to raise living standaxds, extend life-expectancies, fight disease, and invigorate agriculture squandered.

Tolerating Failed Policies. To be SUE, with much fanfare the U.S. Agency for International Development (AID) and the multilateral financial institutions in recent years ostensibly have been pushing market economic reform in the African countries they have assisted. Yet the economic results have been predictably meager because the criteria of AID, of the other U.S. agencies dispensing economi c assistance, of the World Bank, and of the IMF for gauging market reform are far too tolerant of Africas failed economic policies. The core problem with these policies is state control of the economy.

Curiously, Tanzania is being touted by the international development com munity as a success story, and is receiving increasingly generous U.S. and Western assistance, despite its dubious commitment to market economic reform.

AID spending for development projects in Tanzania, for example, increased by some 5 00 percent between last year and this year. Such a rewarding of Tanzania casts serious doubts on whether Americas foreign economic assistance policies are serving Americas interests and the interests of the long and needlessly suffer Learning the lessons f rom Tanzanias mistakes, the Bush Administration should ing Africans revise its economic assistance policies toward Africa. In.doing so, it should Use the Index of Economic Freedom, a system for evaluating a countrys progress in developing a market economy , to determine whether America should assist various countries economically. This would assure that U.S development funds are allocated to countries where they can be used productively Reduce AIDS Development Fund for Africa (DFA its main funding account f o r African development assistance. The fact that AID has increased its spending inTanzania by some 500 percent from last year to this, despite theTanzanian governments half-hearted movement toward a market economy, strongly suggests that AID is spending ex cessively and wastefully in other African countries too.

Eliminate or disregard AIDS Democracy Initiative, a 1990 directive to reward political liberalization in recipient countries with economic development assistance. The Democracy Initiative serves only to obfuscate AIDS economic development goals and responsibilities. Develop and emphasize AID projects that give the U.S. greater flexibility to shift resources among recipient countries. Long-term capital-intensive projects which greatly reduce American flexibility, as well as American leverage over recipient governments, should be phased out gradually.

Give priority to bilateral, in contrast to multilateral, economic assistance.

Despite their rhetoric, the multilateral financial institutions are far too tolerant of failed statist economic policies. American aid thus should not befunnelled through these institutions. The U.S. can put its development assistance policies in accord with the Index of Economic Freedom, but it is unlikely that it likewise coul d reform the multilateral financialinstitutions 2 TANZANIAS TRAGEDY Known as the mwalimu or teacher, Julius Nyerexe long dominated Tanzania, the union of mainland Tan ganyika and the nearby In dian Ocean island of Zan zibar.

He became prime min ister, an office he later trans formed into the presidency of Tanganyika at its inde pendence from British colonial rule in 19

61. Three years later, Zanzibar, which gained its independence from Britain in 1963, united WithTanganyika, creating todaysTanzania In the style of Africas other postcolonial Found ing Fathers, Nyerere brooked no political dissent.

While his rule was less severe than that of many other African regimes, it Lake Vlctorla TAZARA (Tenzanla Zarnbla Aallway AuIhorlIy Tanzania: Inching Toward Refor m 500 Miles 1-1 Nola: Boundary raPrsasnlsllons arm no1 neosuaarlly sulhorllatlye nonetheless featkd political prisoners, a state-controlled press, and a state ruled by one party, the Ch Chu Mupinduzi or Revolutionary Party, known as CCM.

Like many African nations, Tanzania now is contending with previously dormant democratic pressures. Tanzanias slow-paced and tentative movement toward political liberalization has coincided with Nyereres gradual withdrawal from public life.

Nyerere relinq uished the presidency to Ali Hassan Mwinyi in 1985, but only last year resigned his powerful CCM chairmanship. Re-elected to the presiden cy in an October 1990 yes/no referendum, Mwinyi has commissioned a study of possible multi-party political reform for Tanzania. This cautious official response to internal and external democratic pressures also includes a slight loosening of press restrictions and an opening-up of the CCM to wider public par ticipation. While promising, this tentative move toward reform has no certain out come. Even if Mwinyi would want his reign, which is limited by the constitution to two five-year terms, to culminate with a truly democratic selection of his suc cessor, CCM-centered resistance to this would be fierce.

Nyereres Economic Legacy. Nyereks most enduring legacy has been economic. In 1967, he issued his now famous Arusha Declaration, named after the northeast Tanzanian city where it was proclaimed. As the framework for Nyereres African socialism, the Declaration promised Tanza n ias 12 million 3 :itizens improved living standards and greater national self-reliance. These goals Mould be achieved, stated the Declaration, by the Tanzanian government taking iwnership of Tanzanias principal means of production, creating agricultural c ol ectives, and redistributing ivealth along egalitarian lines.

The Arusha Declaration em mdied the socialist principle hat redistributing wealth is more important than creating wealth. TheTanzanian govern ment would redistribute ranzanias wealth largely b y spending it to expand social ser vices The heart of Nyereres African socialism was the agricultural collective, or the ujamaa village. Tanzania was and remains an overwhelmingly agrarian country, with the agricultural sector accounting or almost 50 perc ent of its gross domestic product (GDP and 80 percent of its export earn ings, and employing over 90 per cent of its labor force. The Tan zanian government nationalized all land by 1971 to develop the ujamaa villages, which were fanned communally.

Tanzanian family-hood the villages were said to offer ad vantageous economies of scale.

TheTanzanian government having also nationalized virtual ly all industries and services by 1974, would be able, it was claimed to provide efficiently the tools seed, credit, a nd other fann necessities as well as the full range of social services that Nyerere promised if Tanzanians lived and worked communally Besides promoting ujamaa, or 4 The ujamuu village plan was extended slowly and voluntarily until 19

74. Then the pace aggressively was accelerated with Tanzanian government coercion, in cluding forced relocations of Tanzanian farmers. By 1976, over 90 percent of the 11 million rural Tanzanians lived in 8,269 ujamaa villages.

The Tanzanian government took control of agricul ture with a complex web of state-owned monopoly enterprises, including cooperatives that provided faxm sup plies and marketing boards that purchased and distributed crops. Such organiza tions are known as parastatals-a state-owned and operated monopoly.Ta n zanian parastatals were the sole authorized purchaser and marketer of all Tanzanian crops. the private sector Asians and Europeans who traditionally performed these ser vices out of business. This meant that only one price was offered to Tanzanian fanners for their crops. For export cash crops this price was the world price minus the parastatals handling and marketing costs Food crop prices were set by the Tanzanian government.

The result the Tanzanian government soon dominated almost all economic transact ions in Tanzania. By 1974, virtually all industries and services, including banking and insurance services were state-owned. Exclusive mining rights, for ex ample, were granted to the Tanzanian Gemstone Industries (GI a parastatal created in 19

74. By 1974 the Tanzanian economy had become mm socialist than many of the east European communist economies. The Tanzanian government had vanquished capitalism, which it branded as a colonial-era evil.

Western governments lionized Nyerere as a visionary and poured over $10 billion of aid intoTanzania between 1967 and 1986 The Tanzanian governments monopolization of agricultural distribution farced Nyereres African socialism was applauded by leftists around the world LESSONS IN FAILED STATIST ECONOMICS Whatever Nye r eres intentions, the results of his African socialism policy were quite clear by the early 1980s. Throughout the 196Os, Tanzanias GDP growth rate was healthy, between 5 percent and 7 percent.l By the early 1980s however Tanzanias GDP growth rate had falle n to close to zero.

The demise of Tanzanian agriculture sealed Tanzanias economic doom.

Throughout the 197Os, as free market economists could have predicted, planta tions became dilapidated, processing equipment grew obsolescent, and storage and transport became inadequate. By the late 1970s,Tanzania was importing 78,000 tons of grain annually, double the level of Tanzanias pre-ujumuu days.

Tanzanias cash crop exports fell in volume by 36 percent between 1970 and 1980 1 An annual GDP growth rate of at least 4 percent to 5 percent is recognized by the World Bank as the minimum required far Sub-Saharan countries to avoid food shortages, provid e jobs, and raise living standards modestly 5 I WhereasTanzania en joyed a trade surplus before the. 1967 Arusha Declaration, it was suffer ing a chronic trade deficit by 19

80. Tanzanias artif cially high state-set ex change rates, designed in part to promote Nyereres goal of national self reliance, contributed sig nificantly to this deficit by deterring potential im porters of Tanzanian gods.

The trade deficit also depressed agricultural production as imported consumer goods, which were a major incentive for farmers to increase their production, disappeared from Tanzanian shops ture, meanwhile, eroded and its roads became some of Africas worst.

Tanzanias industrial sec tor, one of Africas smal lest, similarly deteriorated.

Having claimed all mining righ ts, the TGI proved un able to mine profitably many of the countrys mineral resources the West some $5.1 billion and depends upon donors to fund approximately 40 percent of its national budget. In fact, between 1967 and 1983,Tanzania more than doubled its dependence on foreign aid. NyereRs vision of national self reliance has proven a farce and Tanzanian living standards are tragically low.

Tanzanias economy deteriorated despite the massive amount of foreign aid pumped into it, a trend confirming that forei gn aid was wasted in Nyereres socialist economy. Although AID recognized that the Tanzanian government gave precedence to ideological dogma over economic considerations, American aid nonetheless was funneled continually into Tanzania Tanzanias infrastruc T oday Tanzania owes 6 The following AID projects in Tanzania demonstrate how foreign aid is wasted and actually contributes to impverishing people in countries lacking a market economy EW Collectivizing Villages. Despite the economic shortcomings of the uj a maa villages, not to mention the troubling fact that many Tanzanians were forced into them AID directly supparted the villages with several development projects, in cluding the Arusha Planning and Village Development Program. This program sought to upgrad e village health services, irrigation, and crop storage Ujamaa vil lages have been a catastrophe for Tanzania. The relocation of Tanzanian farmers directly disrupted and reduced Tanzanian agricultural production, requiring Tan zania to spend its scarce for eign exchange on food imports, starving its agricul tural, manufacturing, and transport sectors of essential manufactured imports.

The major flaw of the ujamaa village, however, is that like any collective it denies the individual an incentive to work hard er and increase production This primarily is why Tanzanias farm output fell so markedly. Yet AIDS Arusha Plan ning and Village Development Program was designed as American support for the ujamaa village. And while the AID program also sought to promote vi llage enterprises, it did so by assisting theTanzanian governments central planning and control of the economy.

Program gave the Tanzanian Ministry of Agriculture and several of its coopera tives such technical assistance as accounting and marketing resear ch. In effect therefore, American programs strengthened Tanzanias state control of agricul tural marketing, including its price-setting capabilities AID actually decided, in fact, that state-set prices could be used effectively to increase Tanzanian agric ul tural production In reality, of course, state-set or non-market prices were a factor that significantly depressed Tanzanian agricultural production.

Lacking any market competition and staffed with corrupt CCM party members the agricultural parastatals w ere tremendously inefficient. The prices that they set and then forced Tanzanian farmers to accept were so low that farmers lacked in centive to increase crop production. One result was that Tanzanias agricultural parastatals became short of working capit a l. AID tried to remedy this shortage with its Agricultural Credit Project, which granted the Tanzanian Rural Develop ment Bank (TRDB) some $3 million to loan to agricultural cooperatives. In ex tending this American-funded credit, the TRDB gave priority t o ujmu village cooperatives EV Regulated Cattle Market. The Tanzanian Livestock Marketing Company TLMC) parastatal, established in 1974 as the monopoly buyer of Tanzanian cat tle, denied Tanzanian cattle herders access to the world market and its higher pr ices. The wholesale price that TLMC offered to pay cattle herders routinely was well below the world wholesale price for beef. Nyerere apparently wanted TLMC to buy cheap beef so that prices of food would be low for urban consumers.

Urban unrest traditionally has been the most serious threat to African regimes.

The TLMCs monopoly thus denied Tanzanian cattle herders, and the Tanzanim economy, wealth that could have been generated through more profitable intema nzr State-Controlled Agriculture. AIDS Agricul tural Marketing Development 7 tional beef sales. An accomplice in this was the U.S. AIDS Livestock Marketing and Development Project assisted in creating the TLMC, with the goal of helping to establish an effective and efficient livestock marketing system uzr Pork-Barrel Highway Projwt. AIDs Tan Zam Highway Project to upgrade the link between copper-producing Zambia and Tanzanias capital and major port, Dar es Salaam, was begun in 19

70. Millions of Western foreign aid dollars were spent on this, even though Tanzanian transportation was becoming increasingly inefficient because of corrupt and inefficient trucking parastatals.

Western efforts to improve this and other Tanzanian roads continued even after the Tanzanian government essentially stopped maintaining its roads.

The above four examples typify Americas approach to Tanzania. To be sure an AID document written in 1975, following the ujamaa village programs most coercive stage, reveals AIDs concern with some of Nyereres mo re radical economic policies. Yet AID continued with little change in direction. AID ap parently took comfort in the rationalization that its programs were policy neutral. In fact, AID projects directly supported Nyereres socialist policies, in cluding uj a maa villages and state price-setting OTHER WESTERN DONORS The U.S. was not alone in supporting Tanzanias catastrophic economic policies and programs.. All Western donors have supported Tanzanian parastatals Indeed, many in the West argued that Nyereres so c ialism was a superior approach to African development. Such explicit support for Nyereres socialism was particularly strong among the Scan dinavian countries tradi tionally Tanzanias most generous donors. Sweden for instance, pumped mil lions of dollars e v ery year into the very inefficient Bata shoe factory in Dar es Salaam.While this Swedish generosity un doubtedly gave Tanzanians jobs at Bata, it also allowed an inefficient and cmpt parastatal to continue operating at a mere ten per cent of capacity. Suc h Western support, including Sources of Foreign Aid to Tanzania: 1976 and 1986 (Millions of U.

8. Dollars Total 1976- hietanoe $267.1 846 Total 1986 Aseirrtance $676.4 Non-government 8genCle8 much 88 the Unlted Netlons.

Ooumr: Oroanlzetlon for Economlc Co operetlon end Development. World Benk end lnternetlonal Monetery Fund Hrrltege DataChart 8 that from America, was crucial in allowing Nyerere to continue pursuing radical economic policies that impoverished the vast majority of his fellow countrymen contr ol over the Tanzanian economy to perpetuate its own corrupt political rule.

Unlike the East Bloc communist parties, the CCM always has enjoyed generous Western financial support to do so. The crucial question for U.S. foreign aid policy toward Tanzania is whether party time is truly over for the CCM. Does the CCM still control the economy New Beginnings. Inheriting an economic emergency, and being more prag matic than Nyerere, President Mwinyi launched economic reform in 19

86. That year Tanzania signed th e first in what has become a series of financial agwments with Western donors, the World Bank, and the IMF. Like the World Bank and IMFs structural adjustment agreements with other developing countries, these agreements have framed the Tanzanian governmen ts 1986-1989 Economic Recovery Program (ERP and its second phase 1990-1992 Economic and Social Action Program

SAP These agreements ostensibly have committed the Tan zanian government to move toward a market economy. Tanzanias exchange rate price controls, and parastatal sector have been some of the areas targeted by the reforms.

When Tanzanias ERP began in 1986, the U.S. was a relatively minor donor having provided Tanzania with roughly $60 million in assistance since 1981, an amount well below what Tanza nia received individually from ten or so European donors in that time. Americas low ranking was partly due to the 1976 Brooke Amendment to the Foreign Assistance Act of 1961, named after former Mas sachusetts Republican Senator Edward W. Brooke. This amen dment suspends U.S. foreign assistance, with the exception of food, to countries that are over one year in mars on repayment of U.S. government loans. Tanzania fell under Brooke Amendment sanctions in 19

83. As a result, AID drastically reduced its ac tivities inTanzania between 1983 and 19

87. This farced hiatus in U.S. aid toTan zania provided AID with a self-described clean slate when the Brooke Amend ment suspension was lifted in 1987 after Tanzania rescheduled its debt with Western donors, including t he U.S in Tanzania would depend on the Tanzanian governments commitment to its market economic refom course. AID stated that it was wary of once again sub sidizing Tanzanian socialism. As such, the matter of how well Tanzania was progressing toward market economic reform featured prominently and extensive ly in AID planning documents at the time it resumed its activities in Tanzania Also affecting AID spending levels in Tanzania was the Mwinyi regimes progress toward democracy. AIDs emphasis on wielding it s funds to promote democracy abroad has heightened over the last several years. AIDS December 1990 Democracy Initiative, intended to focus and redefme its programs, made it AID policy to include progress in establishing democracy as a factor in deter minin g allocations of AID funds Like the communist parties in Europes former East Bloc, the CCM has used its AIDs clean slate theoretically has meant that its spending levels for projects 9 TANZANIAS REFORMED ECONOMY Despite all the promises about economic refo rm, Tanzanias economic perfor mance remains disappointing. Tanzanias GDP growth rate for 1990 declined to 3.6 percent from 4.1 percent in 19

89. More disturbing isTanzanias deepening trade deficit, which has mushroomed from $670.6 million in 1985-1986 to rough ly 900 million in 1989-19

90. Given the declhing world prices forTanzanias primary commodity exports of coffee, cotton, sisal, and tea, and the very low levels of Tanzanian manufactured exports this deficit probably will not improve soon.

The Tanzanian governments inconsistent and half-hearted commitment to market economic ref- has led to Tanzanias sluggish economic performance.

The Mwinyi regime consistently has resisted IMF pressure to lower the Tanzanian shilling to a more realistic rate of excha nge, thus handicapping Tanzanias strug gling export sector. Faltering too are reforms to the Tanzanian governments budget, a crucial part of the countrys economic reform package. The 1990- 1991 Tanzanian government budget continued to feature generous and unaffor&ble ex penditures and subsidies.

Tanzanias parastatals are particularly elusive reform targets. Roughly 400 parastatals still exist; most of them are corrupt and inefficient. This severely un dermines the prospects for Tanzanian economic development. Yet it was only last year, after a st u dy sponsored by the parastatals themselves had determined that few were economically viable, that theTanzanian government announced that it would close or sell unprofitable parastatals. So far, few, if any, actually have been closed or sold to the private sector. As a result, 80 percent of Tanzanian wage laborers continue to work for the state.

Government Deadbeats. The troubles faced by the Tanzania Electric Supply Company (Tanesco) parastatal typify the problems created by state ownership of Tanzanias in dustries. A high-level Tanesco manager in August 1990 acknow ledged that the utility would have fewer problems, and the electrification of Tan zania would be increased, if the Tanzanian government interfered less in its opera tions and allowed Tanesco to function on a normal, commercial basis? The utilitys persistent losses, he noted, could be explained in part by Tanescos in ability to cut electricity to government ministries and parastatals that failed to pay their utility bills.

To collect these overdue debts,Tanesco in November 1990 launched Opera tion Power Cut. It vowed to cut power to deadbeats. Yet electric power was cut only to Tanzanias struggling private sector operators; service to the Tanzanian governments ministries and parastatals was unaffe c ted 2 The Economist Intelligence Unit: Tanzania, Mozambique Country Report, No. 4,1990, p. 14 10 Parastatal debts also tie up the assets of Tanzanias government-controlled banking system. TheTanzanian government finally has recognized that a public sector banking system is not viable and that an injection of foreign capital into Tanzanian banking is essential. But the limited banking reforms to date have failed to generate the capital needed for.productive investment and economic growth Meaningless Concess i on. Reform also is slow in coming to Tanzanian agricul ture. WhileTanzanian farmers have been granted greater freedom to market their crops, including the right to sell to private traders, this right is almost meaningless since the Tanzanian government re t ains rigid control over Tanzanias agricultural marketing and pricing system. The result is low prices paid to farmers, and conse quently, low agricultural output, particularly of export crops, which are essential if Tanzania is to begin reducing its trade deficit.

The Tanzanian government has not liberalized adequately the countrys mining sector. Having claimed all mining rights in 1974, the Tanzanian Gemstone In dustries found itself unable to mine profitably many of the countrys minerals.

This spurred a thriving black market in Tanzanian minerals. Last December, the Tanzanian government began an enforcement campaign against the unlicensed mining and trading of precious stones and minerals, supposedly by foreign il legal miners. However, more than 25,000 Tanzanians reportedly were moved from mining regions as part of this campaign extent of a countrys economic liberalization. The more extensive they are, the less liberal is the economy. What these gauges now show: theTanzanian black market is booming and o fficial conuption is rampant A booming black market of course, is also a positive sign, It means that there are hundreds of successful entrepreneurs, bubbling with enterprise and creativity. Free market reforms would channel these entrepreneurial energies into the legal economic sector Such black market activity and official corruption offer two good gauges of the AMERICAN AND WESTERN DOLLARS CONTINUE TO FLOW In fiscal 1992, which began this October 1, AID plans to spend at least $24 mil lion in Tanzania T h is current AID spending in Tanzania, close to its total spend ing for fiscal 1991 (approximately $23.2 million), represents roughly a 500 per cent increase over fiscal 1990, when AID spent approximately $4.3 million on projects inTanzania In addition, AID has slated $9.5 million to be spent on its Tanzania-Zambia Railroad Authority (TAZARA) Project for fiscal 1992: AID along with eleven other donors, has assisted TAZARA since 19

87. AID spending onTAZARA in fiscal 1990 amounted to $15 million 3 AD spending fiw for fiscal years 1990.1992 are taken from AID Congressional Presentation, Fiscal Year 4 TAZARA project money, though spent in Tanzania, is disbursed through AIDS Southern Africa Regional 19

92. The fiscal 1991 figure is an estimak acCOUnt 11 The only thing that would justify this boost in AID spending in Tanzania would be Tanzanian progress toward a market economy. Apparently, therefore, AID is satisfied with the Mwinyi regimes half-hearted economic reform performance.

American aid toTanzania, moreov er, has not been limited to AID funds. In March 1990, the U.S. Treasury Department forgave a roughly $40 millionTanzanian debt owed to the U.S. government. This September, the U.S. Department of Agriculture waived a $59 million debt Tanzania owed to the U . S. Commodities Credit Corporation, a federal agency. This second public debt relief is authorized by P.L. 480, which aids less developed countries undertaking significant positive economic measures with the IMF or the World Bank. In this instance, U.S for e ign aid policy is being shaped by multilateral financial institutions that con tinually have demonstrated permissiveness toward state controlled economies This June, citing major accomplishments by theTanzanian government in refonning its economy, Western donors that belong to the Paris Club Consultative Group announced their backing of the final year of theTanzanian governments Economic and Social Action Pmgram with grants and loans on generous terms totalling some $1 billion. This August, the World Bank and IMF agreed to lend Tanzania $242 million through 1994 on generous terms such massive Western and multilateral aid.

The fact is that under Mwinyis leadership, Tanzania has done nothing to merit AID PROJECTS Since AID resumed operations inTanzania, its p rojects primarily have involved transportation, training, health, wildlife management, and family planning. These projects, like their predecessors of the 1970s and early 1980s, are wasteful, if not outright harmful to Tanzanian economic development, beca u se they operate in a statedominated economy hostile to market forces managed? More troubling, TA2ARA in all likelihood will not become commer cially viable. In fact, at least by 1989, AID had recognized that TAZARA probab ly would not be able to survive i n dependent of donor support. The problem was that traffic patterns had begun to shift away from Tanzanian railways. With South Africa now shedding its pariah status, Zambia is again sending its goods via South African transport routes, not via TAZARA. TAZA R A traffic has declined since 1988, exacerbating TAZARAs already weak maintenance capacity and poor cash generation. All these problems have persisted despite massive donor as sistance AIDS $46 million TAZARA project, begun in 1987, has been poorly 5 AIDS O ffice of the Inspector General in Audit Repart No. 3-690-91-03, November 21,1990, highlights poor management and a lack of accountability on theTAZARA project.The audit notes, among other shortcomings that TAZARA lacked an effective system for ensuring th a t AID-financed spare parts worth roughly $3 million were properly aCcounted for upon receipt and while in storage. The spare parts also were not adequately safeguarded against loss, theft, and unauthorized use 12 Another White Elephant. The effects of the s e shortcomings on TAZARAs capacity to date have been masked by donor generosity. At last, however, donor patience is running low, 1eavingTAZARAs future in question. Donor patience also is being taxed by political meddling. TAZARA, like Tanesco still is ha m strung by political interference, affecting such fundamental decisions such as rate-setting. So it appears that for all the Western aid that TAZARA has absorbed the result will be yet another unprofitableTanzanian government white elephant requiring subsi dies, not a vibrant market-driven enterprise.

AIDS 30 million Agricultural Transport Assistance Project ostensibly is to help the Tanzanian government to reduce or eliminate transportation bottlenecks in agricultural production and marketing. This project already has spent some 1 1 million, with at least another $10.4 million slated for in fiscal 19

92. It seems to make no difference to AID that the problem with Tanzanian agriculture is the per sistence of state control; the problem is not transportation b ottlenecks An example of donors directly supporting a wasteful, half-hearted Tanzanian reform is the case of the Open General License (OGL Introduced by the Tan zanian government in 1988, the OGL is a system for allocating the foreign curren cy required t o import goods into Tanzania. The OGL is designed to replace the traditional political method of allocating Tanzanias scarce foreign currency OGL ostensibly gives priority to enterprises that are best able to utilize foreign curren cy. In practice, however , Tanzanian bureaucrats demand bribes from potential recipients of foreign exchange, much of it donor-provided. By backing the OGL foreign aid donors underwrite Tanzanian corruption. 6 HOW TO IMPROVE AMERICAN FOREIGN AID Washington should not be expanding s ignificantly American aid to Tanzania until that country thoroughly reforms its economy. To ensure that American funds in Tanzania and elsewhere are used in ways that help the economy and raise living standards, Washington should Use the Index of Economic Freedom to determine whether America The Index of Economic Freedom is a system for measuring and evaluating a countrys progress in developing a market economy. Among other factors, the Index considers property rights, the extent of economic regulation, si z e of the state sector, taxation, and trade policy. The 1992 Foreign Aid Authorization bill if passed by Congress and signed by George Bush, will require AID to use a com mon standard for evaluating and comparing recipient countriesFrogress in adopt ing ec o nomic policies that foster individual economic freedom should economically assist various countries 6 See Low Marx, The Economist, August 24,1991, pp. 4042 7 Congress may not pass a fiscal 1992 foreign aid authorization bill due to the current versions nu m erous controversial provisions 13 The Index, cited in this bills report, should be used by AID in making this evaluation and comparison. The results should then be used by all U.S. agencies distributing foreign assistance, including debt relief, to determ i ne how Americas scarce development dollars a~ allocated. Washingtons excessive and wasted spending in Tanzania demonstrates that in evaluating economies and allocating American development dollars, Washington needs a fm market economy guide that is much m ore stringent than those guiding other Western donors and the mul tilateral financial institutions. Only countries that score high on the Index of Economic Freedom warrant American development assistance 4 Reduce AIDS Development Fund for Africa (DFA).

The DFA is ADS main funding account for African development assistance contributing approximately 91 percent to AIDs fiscal 1992 budget forTanzania.

Though the Tanzanian governments economic reform progress has warranted no reward, AID funding has soared 500 percent in the past year. This strongly sug gests that other AID missions in Africa are being excessively and wastefully funded. Yet the House is pushing for $1 illion for the DFA in fiscal 1992, which is $200 million more than in fiscal 19

91. Curiously, AID requested only $800 million from Congress. In Africa, where state-dominated economies are common 800 million is more than enough money to assist those few countries that would score high on the Index of Economic Freedom 1 4 Eliminate or disregard AIDs Democracy Initiative.

AIDs Democracy Initiative begun in 1990 aims to reward political liberaliza tion in recipient countries with economic development assistance. Though surely well-intended, the project detracts from what should be AIDS s ole goal: promot ing economic development through support for market economies defined by the Index of Economic Freedom. Supporting democracy may be the appropriate task of the State Department, National Endowment for Democracy and other federal agencies. It is not a goal of development assistance. To make it such a goal dilutes AIDs accountability for development progress in the countries that it assists.

Tanzanias Mwinyi no doubt won millions of dollars in American economic as sistance by sanctioning a s tudy of possible multi-party political reform forTan zania. While his action rightly was applauded and richly rewarded, Tanzanias economic reforms have lagged. The Index of Economic Freedom, moreover, will boost dem acy, for market-driven economies are th e surest route to lasting democracy. T 8 The Senate came to the 1992 foreign aid authorization bill conference with $800 million slated for DFA for fiscal 19

92. Without a fiscal 1992 authorization bill, at least $800 million will be spent far the DFA in f iscal 1992 via continuing appropriations resolutions 9 Evidence that successful market economic reform must predate democracy in reforming socialist countries appears in Poland, whose October 28 election results bode poorly for the continuation of its new and bold market economic reform program. The Polish people, feeling the sting of this market economic reform program apparently have signalled their desire to reject it before it has had a chance to succeed 14 Develop and emphasize AID projects that give t he U.S. greater flexibility to shift resources among recipient countries If the Index of Economic Freedom is to be used by U.S. agencies distributing foreign assistance to determine how Americas development dollars are allocated then the U.S. needs flexib i lity in its development assistance commitments. A country scoring high on the Index one day, may not,score so high the next. The U.S. should be able to respond to such changes. It cannot do so if it is involved in long-term, capital-intensive projects suc h .as TAZARA. The dilemma of whether or not to stop supporting a project in which significant resources already have been invested undermines the credibility of American threats to halt projects, thus minimizing American leverage over host governments. The t urbulence of African politics, the specter of the Brooke Amendment forcing AID missions to close down, and a policy of assisting only market economies all point to the wisdom of keeping programs limited to the short term Give priority to bilateral, in con trast to multilateral, foreign assistance.

The World Bank, the IMF, and other multilateral financial institutions con cerned with promoting economic development have potential advantages as a con duit for aid, including the clout that a generously supporte d multilateral organiza tion has in dealing with aid recipients. The trouble is that American influence within these organizations is waning, while that of the Japanese and Germans is growing. Neither Tokyo nor Berlin has demonstrated any commitment to pr o mot ing true market economics in developing countries. This has been clear in Tan zania, where Western donors and multilateral financial institutions have been too tolerant of state dominance of the Tanzanian economy. Western and multilateral aid, therefo re, merely have propped up the failed Tanzanian economy.

While the U.S. can transform its development assistance policies in accord with the Index of Economic Freedom, it is unlikely that the U.S. could reform the mul tilateral financial institutions. Amer ica thus should give priority to giving aid directly to recipients rather than channeling it through the multilaterals CONCLUSION As one of the worlds largest recipients of foreign economic aid per capita,Tan zania is a paradigm of what continues to be wr o ng with Western approaches to development assistance. Among these shortcomings in Tanzania, one stands out The market economic reforms urgently needed to cat Julius Nyereres legacy of economic devastation and make development assistance worthwhile have no t been forthcoming. Despite this, America and other donors sink even more development assistance funds into the Tanzanian economy. What may be worse Tanzania is being hailed by AID, the U.S the World Bank, and the IMF as one of the African countries making the fastest strides toward market economic reform I 15 In reality, Tanzania increasingly is becoming a ward of the international donor community While there undoubtedly are some American successes in Tan zania, AID projects that do improve the life of a f ew Tanzanians, these ac complishments are not self-sustaining.

They would be self-sustaining if Tanzania reformed its economy in a way that scored high on the market-oriented Index of Economic FreedomiThe resultant economic growth, not expanded and unaffor dable social spending, would allow Tanzania to raise living standards, extend life-expectancies, fight disease, and in vigorate agriculture, while freeing the country of its debilitating dependency on Western aid. Continuing to aid Tanzania despite its la c k of market economic reform is not a sign of U.S. good-heartedness, it is just foolish policy Bold Reforms Needed. It is clear in Africa and elsewhere that market economic reforms must be bold to succeed. Until bold market economic reforms are made in Tan z ania, the U.S. should limit itself to promoting, with political and not economic support, Tanzanian democracy by encouraging President Mwinyi to continue the long overdue political reforms. U.S. humanitarian aid toTanzania in life-threatening emergencies also would be appropriate.

Americas interests in Africa have changed significantly with the Cold Wars demise. There remain valid reasons to assist African countries in developing economically. However, there are no valid reasons to do so inefficiently, or to tolerate the continued wasting of Americas scarce economic development dollars by propping up stagnant economies that are not being transformed rapidly into genuine market economies Thomas P. Sheehy A Washington-based Consultant on Afiica 16

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