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I 3 MACROECONOMIC POLICY AN D PERFORMANCE TTo understan d th e natur e o f curren t adjustmen t effort s i n Tanzania , i t i s necessary to review analytically the evolution of macroeconomic an d other key policies and government responses over the last two decades. There are four periods that seem to characterize economic developments and policies in Tanzania . Th e firs t cover s th e perio d fro m independenc e i n 196 1 t o th e Arush a declaration i n 1967 . The second extends fro m 196 7 to 1973 . The third covers the period from 197 4 to 1982, and the final one concerns the recent years, from 1982 to now. The last period could be further subdivided into 1982-1985, when Tanzania attempted to adjust without external help, and the period after 1986 , since the agreement with theIMF. Each subperiod is characterized by a different set of policies and external influences an d hence must be examined separately. Given our interest in structural adjustment and the recovery, our natural focu s will b e o n th e las t tw o o f th e fou r period s mentioned , particularl y th e mos t recent, since the earlier ones have been covered extensively i n other literature. Our effort will be to understand the extent to which economic performance has been related to policies an d external shock s and how th e government an d the economy of Tanzania have responded. Our analysis in this chapter starts with a review of debate on the origins and causes of the economic crisis. The second section reviews recent macroeconomic 27 28 Alexander H. Sarris and Rogier van den Brink developments and existing interpretations of the trends. The third section reviews the debate concerning devaluation, the policy that has been the source of the most controversy i n the contex t o f stabilizatio n an d adjustment . I n the subsequen t section we examine the financing of the domestic and external deficit. In the final section we make new estimates of the unobserved, "second" economy in Tanzania and provide a picture of the total economy, observed and unobserved. INTERPRETATION OF THE CRISIS AND THE ADJUSTMENT DEBATE There has been wide debate concerning both the causes of the crisis in Tanzania and the appropriate responses. In this section we shall review some of the major arguments, providing wherever possible some new elements. Our earlier review of the structure of the economy and the evolution of policy from independence until the late 1970s shows a continuing effort by the government to control the economic forces and processes in the country through direct control o f al l sphere s o f economi c activity . Th e underlyin g rational e fo r thi s attitude wa s tha t th e bes t wa y t o achiev e a fast pac e o f economi c an d socia l development was to rely on a top-down system of economic and social contro l and modernization through adoption of foreign technology. These attitudes were manifested i n th e nationalizatio n o f privat e firms , th e abolitio n o f produce r cooperatives, the villagization campaign, the substitution of state production and marketing of both agricultural and nonagricultural products, and the adoption of the largely foreign-exchange-intensiv e Basi c Industrie s Strategy . The result of these policies, by the late 1970s , was an economic structur e in which activit y was suppl y constraine d an d depended quit e heavil y o n import s fo r it s prope r performance. Despit e effort s a t diversification, agricultur e an d even u p to the present, remains dominant as a generator of income and, more crucially, foreign exchange. Ndulu (1988) has aptly summarized the main macro features of the Tanzanian economy. Besides the overwhelming importanc e of agriculture and the supplyconstrained , import-dependent natur e of production, the links among the fisca l deficit, the balance of payments, and the money suppl y process are key. While in th e lat e 1960 s an d early 1970s , th e monetar y bas e wa s backe d mainl y b y foreign asset holdings, by the late 1970s , almost 90 percent of the expansion of the monetary base was due to net claims on government...


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