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THE IMPACT OF STRUCTURAL ADJUSTMENT PROGRAM ON ECONOMIC GROWTH AND POVERTY REDUCTION IN TANZANIA

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THE IMPACT OF STRUCTURAL ADJUSTMENT PROGRAM ON ECONOMIC GROWTH AND POVERTY REDUCTION IN TANZANIA Powered By Docstoc
					PAPER PRESENTED AT MZUMBE UNIVERSITY IN 2007

THE IMPACT OF STRUCTURAL ADJUSTMENT PROGRAM ON ECONOMIC GROWTH AND POVERTY REDUCTION IN TANZANIA

ELIAS PETER BAGUMHE MSc DEVELOPMENT POLICY TEL. +255 713191695 EMAIL-peterbagumhe75@yahoo.co.uk

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ABSTRACT This paper review the experience of Tanzania in implementation of structure adjustment program from the mid 1980`s, and the impact of SAP in poverty alleviation. It begins with a review of the reason why SAP comes into existence in Tanzania, with an examination of the specific reasons for the failure of SAP in the country. On the second hand the paper examine how the process of SAP is undertaken by countries implementing the program in Africa. Finally the paper attempt to suggest some factors if implemented will help to redress the adverse effects of SAP in the country. the paper also pinpoint that it is difficult to reconcile domestic problems through resorting to international requirement, like wise the idea that the state has nothing to do in the economy, this is a radical view which even the IMF and World bank has come to realize.

INTRODUCTION 2

There is no single explanation for African poor performance before the adjustment period. The main factors behind the stagnation and decline were poor policies both macro economic and sectoral, Emanating from a development paradigm that gave a state a prominent role in production and in regulating economic activities, over valued exchange rates and large and prolonged budget deficits undermined macro economic stability needed for long term growth. Protectionist trade policies and government monopolies reduced the competition so vital for increased productivity. In additional the policy option of nationalizing enterprises and financial institutions and introducing a web of regulations and licenses for most economic activities did not deliver on their promise. More important the development strategy had a clear bias against export, heavily taxing agricultural exports, one of the most suppliers of foreign exchange. (WB: 1992) Agriculture rather than being stoked as the engine of growth was taxed to provide the resources to build a modern industrial sector. Government draw up five year created public enterprises and enacted regulations to control prices, restrict trade and allocate foreign exchange in pursuit of social goals. At the same time countries were struggling to establish themselves as nations and put new governmental structures in place. (WB: 1994) All the above strategies were meant to enable Government to deliver on the promise of independence that did not work to the extent that in the beginning of 1980’s most Government were bogged down by the Established State owned Enterprises. In the attempt of reacting to this development problems marked the introduction of Structure Adjustment programs. According to Gonchaves (vol. 20b) define structure adjustment programs as the implementation of measures oriented towards at least one of the following objectives: (a) To facilitate the process of change in the structure (b) To reduce anomalies within structure (c) To eradicate the cause of structure (d) To eliminate discrepancies between structures. This paper tries to expound many issues that are essential to the evaluation of structural adjustment program at its reality and current economic situation in Tanzania. The purpose of this paper is not to provide answers but to shed some light on how SAP is currently operationalized in Africa and Tanzania in particular, that is, to open up the “black box,” and to indicate the operational design elements around which variance is the highest. And to pinpoint the problem and look at the impact brought about by structural adjustment program in the strategies of poverty reduction in Tanzania. More over the paper provide 3

some recommendation and the way forwarded as well as a new way of thinking about the problems and performance of structural adjustment program in our country. The paper is divided into six parts. Part one highlights why reform came into the existence and the overall goal of reform. Part two briefly discusses the situation of Tanzania in the mid 1970s and early 1980s as well as indicates the immediate response of Tanzania to packages of IMF and World Bank. Part three discuss how the process of SAP is undertaking in the country and the major factors for unsuccessfully implementation, part four reflect the direct and indirect impact of SAP on poverty reduction in the country. Part five of this paper pinpoints the way Tanzania should do to redress the impact of SAP in the country. More over part six of this paper provides criticisms of SAP in SSA and what Tanzania can do for a sound Development Policy in our country and finally conclusion.

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PART ONE FACTORS THAT NECESSITATED IMPLEMENTATION OF SAP IN TANZANIA Tanzania’s Socio – economic development has been guided by the principles that were laid down in the 1960s soon after attaining Independence with the dominant idea of the post would war II period, that the state could be set to do better than the market, and should therefore play a critical role in guiding societies that lacked a strong entrepreneurial class towards a sustainable growth faith. But this development approach began to loose its popularity progressively particularly in Developing countries including Tanzania. As its limitations began to show up in the form of increased burden on Government finance, resulting from inefficient state owned enterprises, inflated bureaucracies, low productivity, and foreign exchange shortage. It seemed that the state had failed to deliver its most important promise of bringing sustained growth and development. Thus, the pendulum began to swing slowly since 1970’s in favor of reducing the role of the state and increasing reliance on market economy. (Bauza .K: 1992) Semboja H. et al (1993) added also that by the end of 1970’s the steady progress, that has been made in Tanzania economic growth and in meeting the basic needs of the population had been put under stress, due to problems in the productive sector. The capacity of Tanzanian economy to support the delivery of basic social services comes under so much strain that some of the achievements began to be reversed. These reversals had an adverse effect on the quantity and quality of basic social services, by the end of 1970 there was an imbalance between the level of national earnings and the level of consumption Many LDC’s in the mid 1970’s experienced serious macro economic instability. Such instability comprised huge public sector deficit as a percentage of GDP, large and chronic balance of payments deficit some time bordering on insolvency, accumulative huge and non – sustainable external debts and high inflation and currency over valuation. This macro economic instability for the case of Tanzania was precipitated by both external and internal factors. The major external factors were associated with trends in world price, the break up of East African community the Kagera war, Global economic recession. Internal factor were associated with the story that During the 1960s and 70’s Tanzania implemented policies of self – reliance and protectionism, which entailed state taking the leading role in national development. These included extensive compulsory villagization, nationalization and price controls. The nationalization of the private owned companies since 5

1967 and creation and management of state enterprises was based on the infant industry considerations, and the thinking that the state was in a better position to guide the society to ward sustainable development.(Gerald E.1992). Another justification for the Nationalization of private firm (which increased from 47 in 1967 to 450 in early 1970’s) and extensive involvement of the state in productive activities was the ability of the state to control negative externalities, exploit economies of scale and operate fund at officially optimal level. The outcome proved other wise for Tanzania. The state owned cooperation turned out to be inefficient in almost all areas of their operation. They operated under natural monopolies and since their managers were subject to poor incentive mechanism they performed poorly at the same time, the government tended to intervene in their operation to fulfill political goals. Such intervention in the lending activities of state owned banks for instance led to crowding out of private investment initiatives in favor of state owned companies thus stifling private sector productivity. (Njunwa M: 2005) Nevertheless the country continued to operate the parastatal with various problems such as weak management, weak financial performance, and shortage of skilled and motivated technical staff as well as excessive employment at all levers. The operation of parastatal have often dependent on subsidies such as direct subventions from the treasury, tax exemptions, un credit worth loans from commercial banks and defaults on payments. Therefore over the period it has turned out to be impossible for the government to manage its investments in parastatals due to difficulties both financial and managerial. The heavy reliance of the parastatals on the exchequer has caused a lot of concern and hence the need for change of policy (URT, 1999:28) During this period the country experienced short-run, growth, but a long – run economic downturn. By the 1980s Tanzania was the World’s second poorest country in GDP per capital terms and it seems that for the most part its problems was related to poor policies and structural weaknesses ( Wangwe S.M. and et al 1998) Tanzania like other Developing countries had to deal with the IMF and the World Bank to seek loans and to extend the loan repayment period for principal and interest. Some LDCs had to renegotiate loan with private international banks and domestics agencies to cover a domestic budget or external balance of payment deficit.

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In response the IMF and World Bank strongly advocated their conditionality clause i.e. structure adjustment and stabilization policies, before they first agree to advance further loans to countries suffering from serious macroeconomic instability. The structure adjustment policies required countries to adopt appropriate monetary, fiscal and trade policies to reduce internal and external deficit and bring down the rate of inflation from a high level. (Ghatak S. 2003) The overall objective was to promote economic growth by pursing prudent macro economic reform policies, to improve economic efficiency and productive capacity. Policies are also designed to promote enough flexibility in the economic system of LDC’s to absorb the adverse impact of any negative shocks, at the same time some macroeconomic stabilization policies like, reduction of public sector deficit and money supply are supposed to bring down the rate of inflation, and increase the competitiveness of the economy. In view of the above factors that caused macroeconomic instability in LDCs including Tanzania IMF and World Bank imposed the following packages. • Liberalization of the economy through elimination of controls, privatization of Public sector assets, deregulation and promotion of competition to promote efficiency and economic growth. Monetary contraction, restrictions on credit to the Public sector and increase real interest Rate (nominal interest rate the rate of inflation and reserve to end a state of financial repression reveal savers and reduce the rate of inflations. Fiscal contraction, which implies a reduction of public sector deficit though cuts in Public expenditure (rises in Taxation). The overall aim of fiscal stability is to pursue sustainable economic growth, by enhancing the credibility and reputation of government policy. However control of government deficit implies a massive cut in social services for the poor and staple food subsidies. Trade liberalization via the dismantling of tariff barriers, quotas, reduction of distortion in exchange rates and other forms of trade controls. Devaluation of the exchange rate has often been a precondition for the serious negotiation of a structural adjustment program rather than a part of the program as such. Incomes policy, wages restraint and removal of subsidies and reduction of transfer payments.

•

•

•

•

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•

A general opening up to the economy to international finance to promote globalization which is supposed to benefit LDCs via a freer flow of goods, capital, labour knowledge and organization (Ghata S. 2003)

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PARTY TWO RESPONSE OF TANZANIA TO SAP Many missions were sent from Washington to communicate this message to officers in Tanzania government, including the president himself. Nyerere (the late) however looked at the matter quite differently, first of all for the fund and the bank to set conditions for future financial support was seen as an infringement on Tanzanian’s National sovereignty. In response to the specific call for a major evaluation of the Tanzanian currency Nyerere argued that it would be political suicide, on several occasions he insisted that a major devaluation would lead to riots in the streets. For Nyerere then, structural adjustment was entirely a question of politics and ideology and it became increasingly a political game with Washington institutions as the main opponent. Much of it comes to focus on the exchange rate issue, where the political prestige aspect was most obvious. As the agency was the appropriate policy reactions went on, the economic decline continued and worsened. Official statistics based on national accents shows an average annual decline in real GDP per capital 0.5 percent between 1965 – 1985 the national account statistics however do not capture the full extent of the contraction since producers withdrew from the market and increased the barter trade. Fall in consumption level and increased level of malnutrition, hence mortality rate increased this was followed by decline in export in 1985. It can be argued that since 1970-80 Tanzania economy has been facing serious and chronic balance of trade deficit as the table shows: Table 1 PERIOD 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 EXPORTS 2797.2 1913.1 2312.7 2581.2 2878.1 2754.0 4108.0 4464.2 3670.6 4407.0 4165.0 IMPORTS 2274.2 2725.6 2882.9 3478.9 5377.0 5709.4 53349.5 6161.3 88797.7 8941.0 10047.0 BALANCE -47770.0 -812.5 -570.2 -897.7 -2498.9 -2945.4 -1242.5 -1697.1 -5127.1 -4537.0 -5882.0

Source: (Bank of Tanzania 1980)

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The State Owned Enterprises that Nyerere depended failed to generate the expected dividends and Tax revenue instead depended heavily on bank and government subsidies. The political iron of the holding operation by Nyerere is that those whom he claimed he wished to protect from the fall of living standards through devaluation, the urban population became the prime victims of his policies with little or nothing to buy in the store and with horrendous prices in the parallel markets there were worse off, most of them were the peasants. Eventually it was in the year 1985 when Nyerere resigned and left the presidential post to Mwinyi who opened. She door of structural adjustment program in 1985

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PART THREE HOW THE PROCESS OF SAP IS TAKING PLACE This section of the paper explains how the process is facilitated in the country as well as other countries implementing SAP. Structural adjustment program without stabilization is extremely very difficult process all countries doing reforms are performing the two process simultaneously i.e. stabilization and structural adjustment. Stabilization is the process of excision the aggregate supply. It is required because AD>AS which = (C + I + G (X – M) but because AD >AS we have to down size or right size AD to equate to AS. The core point of stabilization is reduction of aggregate demand through macro –economic management, fiscal and monetary measures usually accompanied by devaluation. Stabilization is the short run activities aiming at the following. - Reducing balance of payment deficit primary through collecting an over valued exchange rate. - Reducing government budget paucity through controlling expenditures and imposing additional taxes. - Controlling the money supply, which in turn depends on reducing the budget deficit - Increasing a certain price such as interest rate, and eliminating government subsides on goods and services and finally. - Reducing inflations. Structure adjustment program is a longer term and more complex process with profound impact on the role of the state in economic activities. Structure adjustment is associated with the following. - Adjusting prices to scarcity value (opportunity cost) - Freeing the market to determine prices and allocate resources. - Shifting resources from government to private sector – decision – making including privatization of state owned enterprises and services. - Rationalizing the government remaining roles in development activities so that same sorts of efficiency criteria are met. - Reforming institutions to bolster competition with sector and carry out government modified role. - Decentralization of management of national economy.

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Since the process of structural adjustment and stabilization are undertaken together by countries implementing reform it can be easily elaborated by the diagram below.

Expenditure AD = AS

Before stabilization F B AD = C+ I+G+(X-M) After stabilization AD = C’+I’+G’ + (X’ – M’)

YI

Y2

Income

Line AD = AS shows the equality position and line AD = C +I + G (X – M) is the actual aggregate demand of the economy. Y1 indicate the actual supply, because the actual supply is less than actual demand then it means animate inflationary gaps indicated by F, then the short term task that is stabilization is to down size AD to the actual AS at point B and it is at this point inflationary pressure is eliminated. This is maintained through increase in output but it will take a longer period of time and the movement from Y1 – Y2 is the expected result of structure adjustment program, which is the increase in economic growth (Nkya : 2002)

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WHY SAP FAILED TO BE IMPLEMENTED IN ITS INTENDED SHAPE Despite of the proper formulation of SAP. The policies failed to be implemented in anything like the shape envisaged by the architect,(IMF and WB) as Gerald E. Scott( remarked the following factors as the major causes, he classified these cause into two groups structure factory and specific reasons inherent in Sub Saharan Africa. With regard to the structural factory first there is a typically heavy dependence on exports of primary commodities for foreign growth of demand in the developed countries past created secular balance of payments difficulties for SSA nations. Second, the physical and financial, infrastructures are rudimentary, with limited infrastructures, productive investments even when soundly based, encounter serious limitations that inhibit their effectiveness. Third there is limited domestic production of manufactured good, so an increase in income is immediately translated to an increase in demand for industrial imports. Because these imports are usually not readily available as a result, of controls, the immediate effect is inflation. Local manufacturing industries are limited not only by inadequate infrastructure but also by lack of foreign exchange, skilled technicians and managers. Fourth, government and public sectors are sometimes very poorly managed by incompetent and corrupt officials who not only are incapable of formulating and implementing development projects, but also operate with political and administrative structure that is devoid of co-ordination in economic decision making. Apart from these structure factors which have undermined the SAP. The specific reasons why this mechanism has failed to achieve the desired results include, oil shocks, exchange rates and real interest rates, deteriorating terms of trade and protectionism in developed countries. We shall discussion one after another how it leads to failure of SAP. Oil Shocks, following dramatic increase in oil prices the Low elasticity of Tanzania demand resulted in major increase oil imports and thus very serious deterioration of current account balances. Further more the oil Shocks caused serious recessions with the developed countries, which ultimately depressed demand for Tanzania export. Thus while oil import could not be readily reduced, export receipts dwindled resources for 13

adjustment and growth because even scarce, and countries had to squeeze out development expenditures. SAP has been adversely affected by flexible exchange rates and high real interest rates, the steep rise in the value of dollar through the mid 1980 resulted in rise of expenditure in debt servicing and imports, the dearth of domestic produced industrial goods, means that most of the needed capital and consumer goods have to be imported. The unavailability of foreign exchange and the need to curtail imports have led to a situation in which the bulk of uncommitted foreign exchange is increasingly allocated to goods needed for survival. Thus the process of adjustment is considerably undermined. The adjustment process has also suffered rates a low or negative level in the 1970s a more than 8 percent in the 1980, this debtor countries, there by reducing adjustment and growth. as a result of high real interest real interest rates increased to increased payment burden for the resources available for

SAP has been also affected by deteriorating terms of trade and protectionism. This unfavorable development has been aggravated by increased protection, recession and the use of concretionary monetary and fiscal policies in a country like Tanzania. The ultimate effect is a reduction in demand for Tanzania exports and a loss of potential foreign exchange that is required for adjustment and growth. Symmetry in the adjustment mechanism this has caused a stormy burden in the shoulders of deficit countries. A good and effective international monetary system should more evenly distribute the burden of adjustment irrespective of the nature of the disequilibrium although the deficit countries in SSA face the most serious need for resources; they are namely the recipient of such resources even though they are badly needed for orderly adjustment and growth.

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MACROECONOMIC PERFORMANCE UNDER SAP Sound macroeconomic and structure reform have yielded substantial economic growth and impressive performance of the economy at the macro lever during reform period. The overall economic growth has been rising consistently from almost 1 percent in the mid 1980`s to 6.7 percent in 2004(URT: 2005).The achievements in GDP growth stemmed from agriculture, wholesale and retail trade, hotels restaurants and tourism mining and manufacturing. For the past ten years, the rate of inflation has significantly declined consistently from 27.1 percent in 1995 to 4.4 percent in 2003 and registered an annual average rate of 4.2 percent. However both the basket and weights of goods and services for the National consumer price index (NCPI) have been revised based on the result of 2000/01 Household Budget survey. Following this revision the national Bureau of Statistics current produced NCPI using the new basket and weights, which reflect recent changes in consumption pattern by households. For the past ten years, Domestic revenue collection has significantly improved following the improvement in Tax administration systems, Rationalization of Tax regime and tax reforms with regard to government expenditure. The authorities are mindful of the continued presence of structural impediments to private sector activities. And are pursuing far reaching structural reforms. In addition to ongoing reforms in the areas of tax and the financial sector. The authorities continue to undertake a range of measures aimed at (i) improving public enterprise performance, particularly in the energy sectors,(ii) fighting corruption and improving governance and (iii)strengthening the legal and institutional environment for private sector activity. , A substantial improvement has been achieved due to adoption of various expenditure measures and processes; including Public expenditure review (PER) Medium term expenditure framework (MTF), integrated financial management system (IFMS) and implementation of public Finance and Procurement Acts of 2001and later revised 2004. Stability in money supply which is reflected in a relatively stable aggregate money supply (M3) during the past decade. However the increase in money supply from 17.0 percent in 2001 to 22.7 percent in 2003 and 18.0 percent in 2004 is explained by the increase inflows of donor funds, expert earning as well as tourism receipts. There has been decline in domestic credit to Government in the past four years. This decline has led to a significant increase of credit to private sectors. The

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decline in the banking system net credit to Government is attributed to the Government repayment of domestic debts. In addition to macroeconomic stabilization and structure reforms, more efforts have been directed to poverty issues through the initial poverty reduction strategy (PRSP) and the recent adopted National strategy for growth and reduction of poverty (NSGRP-MKUKUTA) aimed at addressing comprehensively the critical issues of economic growth and reduction of income poverty, improvement of quality of life and social wellbeing as well as governance and accountability.

SAP has created ground necessary for establishment of the market economy; this has attracted foreign direct investment in the country. At least now in our economy price can play its role both as the carriers of information to producer as well as to the consumer and resources are now allocated according to its scarcity value. Stability in various macro economic indicators has made it easy for the investor to project their return, and people started to build entrepreneurship culture. But the main problem affecting most of Tanzanian they fall to interpret the opportunities created by the market. This is due to the fact that, they are coming from the socialist hung-over, that the state was assumed to do every thing for the people.

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PART FOUR DIRECT AND INDIRECT IMPACT OF SAP ON POVERTY REDUCTION Because poverty is the complex phenomenal hence its impact has categorically analyzed. That is the impact on Families, on farmers income, enterprises and informal sector activities, and finally the impact on globalization, does it reduce or accelerated poverty? Poverty reduction as defined by Bagachwa (1995) means lifting the poor out of poverty Pro Wangwe (1999) pointed out that poverty alleviation occurs when the poor, through their economic activities, enhance and stabilize their income through widening markets for their produce, diversification of output and increased efficiency so that there is a direct and indirect expansion of productive assets and capital accumulation in general. Weakening of family Ties, The crisis period has induced response at various levels. Families have been weakened by the processes of fragmentation and have become more dispersed and heterogeneous. The capacity of extended families to function as social safety nets has been eroded. Changing personnel and family relationships are a response to the social and economic changes that are Female taking place. Headed households are usually identified because of poverty concerns. In Tanzania the number of family headed households has increased from 11% in 1976 to 156% in 1992 (URT, 1994 adopted) in recent years many women have entered the labour force. Women and children engage in various income generating activities as a survival strategy. This is the evidence to include how the intensity of poverty has been increased at a family level during reforms era. For households the process of intensification of labour has occurred while the function of the extended family as a social safety net has been eroded considerably one implication of this development is that there is need to design alternative social safety nets to assist vulnerable groups to cope with changing conditions in society ( Wangwe 1999). Erosion of the capacity of Institutions one of the major reason for the implementation of SAP in Tanzania was the failure of the state owned enterprises to generate the expected output instead they appeared to be a heavy burden to the government. SOEs increased from 43 in 1966 to 450 in 1987 (Peter 2003 un Published) Basically Public sector were undermined for being the primary caused of the macro economic 17

instabilities. during the early 1980s and therefore the private sector was expected to take up some of the activities of the state institutions but has so far not responded as readily as was anticipated. It is becoming apparent that the flexibility (ease with which the sector would respond to policy change) and capacity of the Private sector were over estimated. The kind of the private sector that prevailed in Tanzania in the era of public sector led development had special characteristics. It was a private sector that had largely survived by actively engaging in activities the state could not perform adequately. However the capability of the Tanzania Private sector is not adequately well suited to handling the new activities emerging as result of reduced state activity, indeed in many cases the withdrawal of the capacity of the state were not matched by responses from the private sector, which tended to lag behind the fast retreating public sector in many activities. The implication of these to the society is the existence of Inadequate social services delivery hence people suffered because of inadequate social service/unemployment, low income retrenchment and compulsory retirement all of these factor have poverty dimension. Impact on farmer’s income in Tanzania about 85% of the Total population leave in rural areas and 75% of the rural population depend from farm activities. The procedures of export crops have fetched higher prices following a large devaluation of the Tanzania shilling. The Shilling has devaluated from 16Tshs per Dollar in 1986, to 192 per dollar in 1989 and 890 Tshs. Per dollar in 2000 (Peter 2003 unpublished) and further to 1216per dollar in year 2006 (Financial Time 22 march 2006). This devaluation has raised the price of the imported inputs. To the extent that the import content of inputs is high, the increase in real incomes is likely to be dampened. This has a necessary Poverty implication to the livelihood of he farmers which constitute more then 75% of the total population. Likewise the removal of fertilizer subsidies had the effect of raising the price of fertilizers and therefore reducing profitability of the fertilizer – using agricultural activities. The largest share of fertilizer was sued in the production of export crops such as tobacco and by medium and large scale growers of maize. The removal of subsides on maize meal is likely to have negatively affected urban consumers of maize, but two factors may have reduced that impact. First the subsidized maize meal which had also been price controlled, was sold at higher un official prices even before the subsidy was removed due to the un effectiveness of price controls. The liberalization of the grain market ended the monopoly of National milling Co operation and allowed competition among many suppliers of grain to the urban centers. This helped to prevent grain prices from rising following Liberalization ( Wangwe 1991). 18

Impact on enterprises and informal sector activities The structural reforms implemented since the mid 1980s have shifted the emphasis from direct control and rationed access towards greater reliance on market allocation and enhancement of private sector development this shift have reduced the earlier bias of resource allocation in favor of large firms. Impact liberalization especially through own funds import, has resulted in improved supply of intermediate industrial inputs and spare parts, enabling a number of small firms to recover from low levels of output they have penalized other activities over two thirds of the firms that responded in a recent study referred to by Bagachwa (1995b) reported that it was easier to obtain imported inputs and over half found it easier to obtain domestic inputs during the period of economic reforms. In same cases however, excessive competition among small firms has reduced profit merging and lowered their sales volume. According to the study by Bagachwa (1995) suggested that the impact of economic reforms on output had been mixed and differs by sub – sectors as shown in table 16 firms increased output were in trade/restaurants/hotels (69%) community and personnel services (65%) and manufacturing (57%) stagnation in output was reported to be highest in mining and quarrying (68%) and construction (57%) in all firms the increase in employment lagged behind the increase in output on indication of rising labour productivity most likely through higher rates of capacity utilization.

Same small rural artisans, such as shoemakers black smiths, cloth – markers have been negatively affected by import liberalization from the output side and by devaluation from the inputs side. Their activities have been exposed to stiff competition from imports, while the shilling price of imported inputs has increased following devaluation. Considering that their products are largely consumed by low – increase earners in rural areas. There are limits to which prices of their output could be raised without under mining sales. Most of them have had to close down, resulting in collapse of their incomes. The availability of cheap imported shoes has had a detrimental effect on the traditional leather and tire sandal making industry which thrived during the pre – import liberalization period. The lift on restricting on imparts of second hand clothes has created expanded employment opportunities for small scale retail traders but at the same time diminished the work of tailors who make garments (R. Wangwe 1999) 19

Impact of SAP on Employment, The most pronounced short term effects of structure adjustment programs have been a substantial decline in the quality and quantity of social service highly financed by government. Compulsory retirement of large numbers of Public sector employees, for whom there are no immediate alternative job opportunities and substantial reduction in real wages and indeed the development of the private sector that is assumed to be at the driving seat of the development vehicle to absorb the increased number of job Seeker is still very thin. The majority of the people have neither the knowledge, skills, nor opportunities for gainful employment in established large organizations but also in the light of going retrenchment exercises and generally decline job opportunities in the formal sector even college graduates are increasing finding it hard to get employment as the result number of Tanzania who enter the labor market each your have amounted to 700,000 but only 30,000 are assumed of getting job (Employment policy). The implication of these is that about 670,000 people each year learn un employed hence they suffer both from income poverty and Basic need poverty because they can not get the capacity even to sustain their basic requirement (Dr. Olomi 2004). Impact of SAP on economic growth, Although SAP has enabled the country to register 6.7(2006) rate of economic growth. This is a steady increase from almost 1% growth in the mid 1980s this increase in economy have reflection to the living standard of the masses. According to the progress report of PRSP of 2002/2003 poverty have remained to be a rural phenomenal and the number of Tanzania living below the poverty line has increased from 48% of the total population in the mid 1980 to 52% of the total population in year 2003. There is a lot of mixing filling in regard of the registered figure of economic growth some people are asking is not the manipulation of statistics? This is suggesting some other policies intervention. The widely suggested policy is to have income policy in place that will address the redistribution pattern of the national cake.

The impact of Globalization in Poverty reduction, Globalization has become a major topic of discussion and concern in economic circles since the mid-1990s. It is clear that the trend toward more integrated world markets has opened a wide potential for greater growth, and presents an unparalleled opportunity for developing countries to raise their living standards. At the same time, however, the Mexican crisis has focused attention on the downside risks of this trend, and concerns have arisen about the risks of marginalization of countries. All of this has given rise to a sense of misgiving, particularly among developing countries.

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Globalization is the process of continuation of expansion of both industrial and financial capital. Globalization is the third phase of development capitalism; the first phase was colonialism and the second phase was new colonialism. Globalization come into third world countries inform of structural adjustment program. Globalization is a Buzz word which has been given to the export of financial capital from LDCs to DCs. But the main objective is to exploit resources from LDCs. One of the most causes of poverty in LDCs is Globalization which is backed by liberalization and privatization, technically it is known as economic democracy. Globalization posses the following characteristics and these characteristics are the agent of poverty in Tanzania. Foreign direct investment, financial in flour, Technology Globalization system, interrelation ship and Trade. For the purpose of this paper I will discuss Trade only as the major causes of poverty in Tanzanian. The kind of Trade which is required here is free Trade which leads to borderless. This border are more open from the center to the peripherals and unfavorable from the peripheral to the center, because Tanzania Industries are still infant they can not complete with Industry from DCs they end up with natural death which cause laying idler workers, Dumping, importation of jack spare part, all of these factors have got same poverty dimension leading to low income and hence low economic growth, as Prof Wangwe 1999 pointed the number and activities of transnational corporations have increased as has the number of their home bases one, consequence of this increase has been the growing role of NIC’s in exporting capital with the form of foreign direct investment during the second half of the 1980s foreign direct investment World wide increased by 29% annually near three times the growth of international trade.

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PART FIVE SOME APPROACHES TO FOLLOW FOR SOUND DEVELOPMENT POLICY This section of the paper attempt to suggestion some approach to follow for further sounds development policy in a country which will be a more poverty focused policy. AS suggested by Pro Wangwe (1998) this factor will help to redress the impact of SAP in the country for the purpose of simplicity we will be discussing one after another. Increase the number of jobs in the economy by ensuring that growth is labour intensive. If the lesson of the 1970s is that sustainability of basic needs and other Socio – economic objectives was limited by the neglect of macro structural adjustment considerations, then the lesson of economic reforms of the 1980s is that focus on the latter is equally perilous. If it is not matched by a concern for basic needs and the light of vulnerable groups in society. During the period of economic reforms the rate of growth increased the resulting rise in the national income was distributed in ways that reduce poverty for same groups and worsened it for others. A number of sources in the literature have indicated that the higher growth of the economy reduced overall poverty and other suggest that poverty increased. On balance it seems reasonable to suggest that poverty declined overall, but some of the poor emerged worse off while the rich got richer. The net effect was an increase in income inequality. There is increasing evidence to indicate that while sustainable growth is necessary for elimination of poverty some patterns of growth have greater impact on poverty alleviation than others. Economic growth is essential for poverty reduction to the extent it increases the number of jobs available in the economy and increase the size of the market for goods and services produced by the poor. A higher rate of growth that is 8% to 10% and which is labour intensive is more likely to achieve these objectives. Poverty reduction may be approached through stimulating labour intensive growth, investing in human capital and putting in place a system of safety nets for the poor. Restore and enhance social services, The ability of the Government to finance basic social services from the poor is a crucial element of poverty reduction especially, Health, education and Public Infrastructure. Heavy investments in these basic social services have an important repercussion in the increase human productivity this lead into high income employment and high agricultural productivity. Rapid restoration of quality and quality of social services is an integral element of any employment strategy.

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Incorporate poverty research into the Policy process, the impact of the SAP has produced some adverse social effect particularly to the vulnerable groups. To cub the situation especial social dimension of adjustment program was introduced the objective of social dimension of adjustment (SDA) is to formulate some strategies to improve the income of the poor separately from reform process. Despite the fact that the SDA have been produced many studies on poverty. But the result on poverty has not yet been used to formulate policies that integrate poverty concerns into development priorities. This suggest that the link between research studies and the policy making process has yet to be put into operations. Sustain programs that support income generation activities for the poor studies, have shown that income generating activities have a more and quick impact on poverty reduction than non income generating activities. The problem is that most of this program is donor funded. The question remains as to whether the program will be able to develop the capacity to be sustainable in the event that donor assistance ends. In order to ensure the sustainability of the program arrangement should be made to ensure that in addition to donor resource, the program serves as a conduct for local resources (Government) public institutions and other sources) intended to support for income – generating activities. Focus on the informal sector and on skill development opportunities. As it has been identified recently that large number of Tanzania are engaged in informal sector due to the impact of SAP. And in ability of the private sector to absorb those who are retrenched from the public sector and the new entrant in the labour market. Each year 700,000 enters the labour market but only 30,000(employment policy) are assured of being absorbed the least engage themselves in informal sector as a survival strategies. Even when there is a chance in the private sector they suffer from the required skills. So focus should be put on skill development to much with the requirement of the labour market and same appropriate policies should be in place to formalize those which is in and informal sectors this s very crucial for redressing unemployment and income generation in the country. Eliminate gender inequalities. Women constitute more than 50% of the total population and women are more vulnerable to poverty than men, because of gender difference in ownership, unequal access to education un equal access to health, water and vulnerability to economic disaster and natural disaster as well as inadequate access to decision making hence the need for main streaming gender issues into national plans and 23

programmes. The main objective is to achieve women’s economic, social and political empowerment.

Establishment and enabling policy environment for private sector development. In order to create an enabling environment for future private sector led economic development same critical issues regarding Industrial and trade policies to be addresses. However this issues cuts across all sections of the economy. The planning commission should work out the most appropriate institutional arrangements for facilitating private sector development. It is therefore recommended that the government continue to be given further support to refocus its policies in line with the new economic environment in which private sector development is given a new impetus. Get the most from the agricultural sector. Because of the obvious fact that more than 75% of the total population leave in rural areas and rural community depend from agricultural to survival and poverty has remained to be a rural phenomenal one focus of attack on poverty should be an increasing returns to agricultural and other supportive rural activities these could include increasing agricultural price, investing in rural primary and Secondary education, improving extension work to increase productivity through the dissemination and adoption of new agricultural techniques, developing agricultural markets and encouraging alternative employment opportunities and mechanization of agricultural activities however the institutional mechanisms to support the development of such activities must be put in place. Analyze and monitor poverty and income distribution trends. One implication of their findings is that poverty analysis should take into consideration the circumstances and conditions that bring about poverty in the first place. The state can play a key role in reducing poverty by supporting research activities in public and private institutions and in the NGO sector to generate information about causes, extent and severity poverty and to provide an enabling environment for the poor to generate income or more generally to pursue their livelihood strategies successively. The central statistical Bureau should generate the necessary data for analyzing and monitoring trends in poverty and income distribution on a continuous basis. Adopt a broad based rural development strategy, it is clear that there is need to create an appropriate environment for the poor to increase their productivity and incomes, which could be achieved though improved access to resources and supportive Public investments. The design of development strategy should be people centered this will require the adoption of the broad based rural development strategy that will 24

stimulate productivity and generate employment and income in the agricultural and non agricultural activities on top of that supportive public investment in infrastructure, technology and marketing will be required.

Make poverty alleviation a concern at all levels of government. Poverty alleviation has been identified a stop priority by the Government however it require a special ministries to deal with the problem the new role of the planning consume should be to assess the parent problem and design relevant programmes, local and community based agencies will be the implementers. Capacity building program are needed to speed up the realization of a comprehensive development strategy. The government has expressed its intention to pursue this end, but the actual design and formulation of such a development strategy have not been worked out. React carefully to global influence, The macro economic instability which resulted into financial crisis necessitated Tanzania to resort to IMF conditionality what is needed now is to work out strategies to enhance National ownership of the donor – assisted programmes and to build the necessary National capacity to ensure sustainability of these development programmes with special attention to these programmes that could alleviate poverty. To the extent that some activities are global it may be necessary to involve global approaches to the solution of some poverty problems like globalization, these approach are like Copenhagen declaration the social summit the world leader made commitment to eradicate poverty. The challenge now is follow up to ensure that mechanisms for implementing the commitments are put into place

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PART SIX CRITICISM OF SAP IN THE CONTEXT OF DEVELOPING COUNTRIES This section of the paper discusses the criticism of SAP in developing countries who have pleaded for less stringency and more flexibility. More over the section provide some highlight to be taken care for a sound development policy in our country and lastly provide conclusion and the way forward. One major criticism of conditionality is that it conflicts with the primary objectives of national development policies. For example encouraging growth, eliminating poverty and unemployment, and ensuring a more equitable distribution of income. Because of its Primary emphasis on demand management with Low level of capacity utilization, employment and investment, there seems to be need for expansionary policies not only to stimulate growth, but also to reduce the reliance on protectionist trade policies. In the IMF view, restricting demand curbing inflation, sacrificing growth initially and eliminating the balance of payment deficit are more desirable acting. Therefore IMF argues, a solid foundation would be established for healthier and sustained growth. In the short run the key is to keep aggregate demand online with the economy’s productive capacity besides adequate financing is usually not available for expansionary policies. Another criticism of conditionality is that it is too standardized and based almost exclusively on Traditional western economies, with Institutional and structural assumptions of well functioning commodity factor, and money market. Even in these types of economies, market imperfections of various kinds sometimes prevent the price mechanism from efficiently allocating resources. This problem is exaggerated in the SSA economies with their limited production possibilities and shortages of essential factors of production, raw material skills capital, and foreign exchange. However reliance on physical controls for the allocation of resources is an inferior alternative because the efficiency administrative machine necessary for their effective functioning is usually lacking in many countries. In additional a proliferation of controls usually lacking in many countries . In additional a proliferation of controls, usually breads corruption which is a most undesirable eventuality especially for countries with very unequal distribution of income. Given their structural characteristics most SSA countries feel that effective implementation of development strategy inevitability requires some degree of state intervention in the economy. The market can not be relied on to reach certain desired outcomes.

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Also the conditionality is too stringent in the higher credit branches and that the major policy changes advocated by the IMF take much longer to Yield result than the three to five years within which repurchases have to be made. The IMF responded by introducing same two – year standby facilities and an extended fund facility that provides medium term loans over a period of three years that are repayable within four to eight years. A supplementary financing facility was also introduced in response to the complaints that members are forced to comply with the IMF’s recommendations on a wide range of policies in return for only a tiny fraction of their financing needs. Further criticism is that the IMF too often and too readily recommends a devaluation and liberalization of exchange and payments arrangements. Many studies (such as those by R.N. cooper and Sweder Van Wijnberger) have pointed to the contraction effects of devaluation on output. This devolution effect imposes very serious damage on countries experiencing very law rate of economic growth rather than solve payment problems, the devolution worsens it because of its unmediated inflationary impact. At the same time because export bases are undiversified and resources in ability is limited between sectors, trade flow are not very responsive to the relative price change brought on by devolution. The supply response necessary for import substitution and export expansion did not materialization in the short run. Thus specific measures aimed at improving domestic production would improve the balance of payment rather than the relative price changes that comes with devaluation. The IMF responds that devaluation is the least painful measures of all policy alternatives to revitalize the expert sector whose development has been stifled as a result of cost and price becoming uncompetitive relative to those of trading partners. Another criticism of conditionality relates to the numerical nature of the adjustment process. The burden of adjustment rest squarely on the deficit countries with no pressure on surplus countries. Thus it is argued, conditionality has caused bias in the world economy. Although economically strong countries can only resort to the IMF and its rigid discipline. The IMF however, has maintained problems, indeed, generally it is these economically weak countries who have poorly managed their economies and who have the greatest need for IMF guidance and direction in the running of their economic affairs. A final criticism of conditionality is that it is political unsustainable when conditionality is accompanied by greater economic hardship especially for the mass of poor who lack the resilience to reduce the adverse effects of conditionality – it became political un acceptable. Many SSA governments have to deal with a variety of civil disturbances as a result of pursuing policies under IMF conditional assistance. In addition, 27

conditionality has been attacked for its non neutrality because it is favorable to and supportive of Socio economic groups who control capital and financial resources and thus are well poised to take advantage of the price and market mechanism (inevitably, there will be further entrenchment and productivity structure. (Kenneth, E. 1992). It is therefore pertinent to point out policies on poverty alleviation need to consider seriously conditions of ownership of productive assets and the socio economic and institutional environment of the poor. In the economic sectors where they are most active. There is need to contribute to institutional capacity building. Market friendly policies should be accompanied by people friendly markets for example participatory institutions. Investment in social services and labours intensive Technologies. As Tanzania has ranked by the World Bank as the good adjusters but the repot by the World Bank itself (1994) pointed that even among the strongest adjusters no country has gone the full distance in restructuring its economy. Although two third of the countries managed to put better macro economic and agricultural policies in place. However reforms remain incomplete. The report emphasized that no African country has achieved sound macro economic policy stance which in broad term means very low budget deficit and positive exchange rate. Social spending while not showing an overall decline during the adjustment period is misallocated within the health and education sectors. And the politically difficult reform of the public enterprises and financial sector lags well behind. Moreover there is considerable concern that the reforms undertaken to date are fragile and that they are merely returning Africans to slow growth path of the 1960 and 1970’s. Furthermore it is pointed that adjustment alone will not put countries on a sustained poverty reducing path. That is the challenge of long term development which requires better economic policies and more investment in human capital, infrastructure and institution building along with better governance. But development can not precede when inflation is high .the exchange rate overvalued farmers overtaxed vital import in short supply, Prices and production heavily regulated, key public services in disrepair and basic financial services unavailable. In such cases fundamental restructuring of the economy is needed to make development possible. The objective of SAP is thus to establish a market friendly set of incentive that can encourage the accumulation of capital and more efficient 28

allocation of resources. Although Tanzania has made great strides in improving policies and restoring growth but it still have a long way to go in adopting the policies needed to move onto a faster growth path and reduce poverty More over the idea that the state has nothing to do in the economy this is a radical view in which even the World Bank has realized. Because before reforms, poor performance of Tanzania economy was blamed on poor policies and the socialist Ideologies adopted following its Independence. Even after having adopted many strategies of reforming the economy and being ranked as the fastest reformer in SSA. It still remains a fact that economic progress achieved so far has not been able to reduce poverty in the country. In fact income inequality has widened or increased and economic management there is still a capacity gap. The pace of reform both economic and political has shown and determination of welfare and other adverse effects on the poor have been blamed on reform programs. In respect of the way forward the paper argue that because successful reform is the result of interaction of many factors there is a need to research on the process of reforms so as to find answers to questions, which remain unanswered with respect to Tanzania experience in economic and political reforms. For instance why is it that despite all the strategies and reforms that Tanzania has adopted it has not been able to achieve substantial progress towards economic development? Why is it that Tanzania has remained foreign resource dependant with half of the population continuing to live in abject poverty? Why is it that income inequality has grown rather than fallen? What has been missing? And lastly is there any alternative approach or path of reforms that the government should have followed to achieve much better outcome?

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REFERENCES Benno J.N paper on Tanzania Economic Development: From the experience and Challenges for the future. Bagumhe .E (2003) Structure adjustment program and the current economic condition in Tanzania: unpublished. Economic Recovery Programme, 1986-89 United Republic of Tanzania. Ghatak Subrata (2003) Introduction to Development Economics: New Fetter, London EC4P 4EE. Kenneth E.B (Ghatak Subrata (2003) Introduction to Development Economics: New Fetter, London EC4P 4EE. Magnus B. (1993) Economic crisis in Africa: New Fetter, London EC4P 4EE. Samweli W (1998) T he impact of structure adjustment program in Tanzania; Paper presented in Ethiopia. Kirkpatrick Colin P (1988) Privatization in Less Developed Countries, Wheatsheaf Books LTD, Simon & Schuster International Group. Heath J(1990) Public Enterprise at the crossroads,11 New Fetter lane, London EC4P 4EE. Savas. E.S(1987) Privatization The key to better Government, Tata Mcgraw Publishing Company Limited. Fandu Cheru (1989)The Silent Revolution in Africa, Debt, Development and Democracy. Zed Books Ltd, London and new Jersey. World Bank (1994) Adjustment in Africa Reforms Results, and the Road ahead. Oxford Universirty Press, Inc 200 Madson Avenue, World Bank Report (1993) Washington, D.C World Bank Report (1994) Washington, D.C World Development Report (1990) Washington D.C 30

World Development Report (1992) Washington D.C World Bank Report (2000) Washington D.C

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Description: This paper review the experience of Tanzania in implementation of structure adjustment program from the mid 1980`s, and the impact of SAP in poverty alleviation. It begins with a review of the reason why SAP comes into existence in Tanzania, with an examination of the specific reasons for the failure of SAP in the country. On the second hand the paper examine how the process of SAP is undertaken by countries implementing the program in Africa. Finally the paper attempt to suggest some factors if implemented will help to redress the adverse effects of SAP in the country. the paper also pinpoint that it is difficult to reconcile domestic problems through resorting to international requirement, like wise the idea that the state has nothing to do in the economy, this is a radical view which even the IMF and World bank has come to realize.