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Gold: Tanzania`s saviour from necessary economic reform

18th May 2012
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Economic observers are likely to be surprised by the extent to which Tanzania is breaking so many rules of economic management in the 21st century, and seemingly getting away with it. What it is not apparently succeeding in doing is to convince many bilateral donors that they should continue raising the budget support levels, though the signals are mixed in that direction. Part of the data shows that budget support rose in absolute terms in 2010 and 2011 but was lower in relation to budget growth as a whole, but there is an impression that there is a definite decline in budget support expected this year.

Donors compelled Tanzania to follow rules of the book only in relation to the privation of the old National Bank of Commerce back in 1997, a move that is still making shockwaves in the heart of the country’s conservative ruling party echelons and radical NGOs. For the rest, there was political will to properly privatize during the second phase administration and it was lost during the third phase, as the conservative political elite and NGOs, based in academia, had generally concluded that the whole spate of privatizations was a massive rip off. The third phase came up with ‘smart privatization,’ where the government sought investors to put money into a state-owned firm for a minority of shares, while the government appointed most of the board, and a portion of top management – and it lamentably failed.

In sum this is where Tanzania stands in relation to economic reform, that it only wants an investor to place money in a state-owned enterprise, he takes none of the fixed property, and pays the workers and puts in the working capital. The state then retains 51% shares in order to have a big say in how the firm is run, and obviously have equal right to proceeds of the company, taking slightly over half of the profit, while putting no money in the business as a whole. Raising the issue of economic wisdom of this sort of arrangement with regime economists and business lawyers brings up the issue of ‘goodwill,’ that merely the fact of permitting a firm to a business like railways inside the country gives one right to 51% profit.

Insufficient economic reform during the structural adjustment programme and thus refusal of restoration of long leaseholds of land both for local people and investors, as well as ability for investors from any part of the world to purchase land on leasehold basis that is transferable, effectively put a stop to real growth in agriculture and industry. During the pre-Arusha Declaration period the pace of growth in the agricultural sector was 13.5 per cent per annum, and this fell to 3.0% per annum during the rest of Mwalimu’s presidency, from early 1967 to late 1985. During the second phase administration a looser crop marketing strategy and some rising confidence brought the rate of growth in agriculture to 3.5%, while the start of rolling back this confidence reduced the effectiveness of the more intense presence of the banking sector, and for seven years of the third phase presidency, the rate returned to its 3.0% level.

The other indication that abandonment of economic reform has done little good to the Tanzanian economy is the industrial sector, that it has remained quasi-permanently at 8.0% of GDP for as many years as there has been statistical records, at least for the past 20 years.

That means it is more or less growing in a ‘natural’ manner on the basis of direct demand as felt in the market, and not an issue of using some sort of comparative advantage to get a higher market share of goods in one way or another or penetrating nearby markets for instance on the basis of EAC, COMESA and SADC arrangements. It was for instance clear that COMESA was already beginning to make a difference as Tanzania was becoming a hub of industries both for the local market and for export to the sub-region, then we pulled out to protect a few local industries, with a rather disproportionate representation among the conservatives.

What finally brought a change was accession to AGOA in 2003, as the US facility which wasn’t reciprocal in character was more or less an extension of the European Union privileged market access, and it cut down voices urging ‘effective protection of nascent industries’ as more companies sought to sell to the US market. Out of the 350 types of goods under which we could sell, we have hardly more than 50 items for sale and the quantities are often minimal, for the simple reason that credit isn’t quite circulating in agricultural sector or in processing, since they do business or obtain raw materials from land that can’t be transferred if a bank (lender) seeks court order to do so. People could start shouting at the ‘kaburus.’

Effective stoppage of privatization, leaving the country with a handful of large state firms which ought to have been placed in the private sector, reduce burdens of subsidies that the government faces – especially Tanesco – and help ease conditions of doing business (especially railways) – is the core of the present crisis.

Indebtedness is running too high because refusal of privatizing the two sectors not only denies the government billions of shillings in revenue, but also condemns it to a trillion shillings to uplift Tanesco activities annually. The European Union as a whole shall this year provide budget support amounts that are inadequate, when put together, to satisfy the gluttony of funds by Tanesco alone.

Without the gold sub-sector producing permanently rising revenues, and to a lesser extent the gas reserves that shall in due course (and to an extent even now) cut down on fuel imports from abroad, it is hard to see how Tanzania would have stayed the course without a chaotic situation pushing it to reform.

The latter comes when a country seeks IMF support against a balance of payments crisis, whereupon it is given a set of precepts on restructuring its economy, whether or not it would be another ‘structural adjustment program.’ The difference however is that the issue seems closed in Africa as countries are capable of manipulating revenues and expenditure to avoid the IMF, hence countries explode due to unacceptable conditions, but hardly has any of them sought IMF loans and be compelled to reform.

Another limitation is the lack of a global consensus on economic reform, since the ‘debate’ on the issue in the 1990s was hijacked by radicalism, which opposed the twin evils of indebtedness and structural adjustment (meant to pay debts to rich countries, or IMF and the World Bank).

They also opposed dictatorial regimes which were often completely corrupt, in which case the issue since the past decade has been transparency in government finances and democratic elections, throwing economic reform per se into the background, and if one listens to Prof. Joseph Stiglitz, Nobel Prize winning IMF arch-foe, the matter is closed. It is a crisis that also faces Europe and rears its head in the Far East; opinion is satisfied with ‘natural economy’ of public ownership of land and parastatals as national ownership of economy.

With the necessary safeguards or all parameters guarded, Tanzania to an extent resembles China and to an extent Russia, where a spate of growth permitted by limited economic reforms runs its course, and then the potential for rapid economic growth begins to falter.

So far Tanzania hasn’t exhausted its ability to grow at 6.5% or even 7% per annum, which top governmental organizations like the Economic Commission for Africa are praising to the sky as among the best in the world, by simple exercise of ignorance on the fact that Tanzania can’t be compared to OECD rates of growth.

There is a world of difference between a country that has abolished fundamental mass poverty and one
that has not, as Tanzania is yet to register double-digit growth for a decade or two, to attain levels comparable to OECD.

At that time, if Tanzania will be able to register 6% growth rate like the United States before the current downturn started in 2008 it would then be phenomenal, but given the potential for growth which is hindered by privatization, what is noticeable about Tanzania isn’t persistently high growth rates but sub-poverty reducing rate of growth.

Even within this context, it is hard to see how the debts and grossly negative conditions of doing business would have failed to catch up with the balance of payments without the manna of gold rent that the country has been enjoying.

And this expectation is corrupting the political elite even further; not only do they reject economic reform but want prompt subsidies for parastatals  or huge bank loans with prompt government guarantee, symptoms of a Greek  type of crisis.

Back in 1970 in his famous essay, ‘The Silent Class Struggle,’ Prof. Issa G. Shivji had cited as a remark a book title by Harry Oppenheimer, following the downfall of Dr Kwame Nkrumah, saying ‘Ghana: End of an Illusion,’ noting that it was vital to point out illusions while they are still standing up, not calling them illusions after they fail. Thus it is helpful if those who know a few things about how countries lurch into economic crises on the basis of frozen ideas of rent seeking classes like parastatal organizations and parliamentary lobbies tied to them,  point out these illusions while there is still time. The way things are going, there are dangers of a chain of explosions from various quarters, as the state loses its authority, after its leading officials are smeared and government action is mired in confusion and witch-hunting.

SOURCE: THE GUARDIAN
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