Tanzania Development economics

Tanzania map

Population

49.25 million

Relative size

945,087 km squared

GDP

33.23 billion USD

GDP per capita PPP$ and inflation adjusted

1760 USD

Unemployment rate

10.3%

Labor force participation rate

86.7%

Government debt (as % of GDP)

39.9%

Trade deficit

-26 million USD

Life expectancy

60.85 years

Literacy rate

67.8%

HIV infection rate

4.7%

HDI

0.521 (rank 151)

Under 5 mortality rate

6.69%

GDP growth rate

+7.4%

Agriculture is Tanzania’s most important sector, and industry and mining are relatively small components of the economy. Tourism is gaining increasing importance for the Tanzanian economy.

Barriers to economic growth: dependence on the agricultural sector, poor infrastructure, corruption, lack of participation of women in the economy due to legal and administrative barriers.

However, Tanzania is undergoing economic growth due to a recent spell of political stability. In January 2016 there was 6.5% inflation (due to a currency depreciation which led to cost push inflation due to high cost of imported raw materials) but has now declined to 4.9%.

The poverty rate has likewise declined from 34% to 28%, but this is largely due to a population increase in other income demographics. 12 million Tanzanians still live in poverty, and many of those hovering above the poverty line are in danger of falling back in.

In the past 20 years, Tanzania has demonstrated an increase in both adult literacy rates and life expectancy, two factors that determine economic development.

The graph above shows how life expectancy, HDI, education and GNI per capita have increased over time. Though growth and development aren’t necessarily correlated, in the case of Tanzania, economic development has coincided with growth which may suggest economic growth has led to development. This is shown by the fact GNI per capita is increasing as the HDI is increasing, and as the rate of HDI increase increases, so does the rate of GNI per capita increase. Between the years 1985 and 1995, both GNI per capita and HDI remained stagnant, reinforcing the idea that economic development in Tanzania may have been caused by economic growth.

The above graph shows how the ratio of girls to boys in primary and secondary education (as a percentage) changed between 1991 and 2004 between Tanzania and another country in Africa, South Africa. While South Africa has consistently maintained a higher value than Tanzania, South Africa’s ratio has been declining while Tanzania’s has been increasing. As a result of this increase, more women are gaining an education and are able to earn incomes. The government will earn more income tax which can be spent on bettering infrastructure, healthcare and education. This is due to an increase in productivity due to an increased skill set by a larger proportion of the population. Women will also be able to afford health care more easily, increasing their standard of living. They will be more educated about birth planning and contraception, reducing the fertility rate. Resources, such as food, will be distributed such that people get more, and with less people there will be less disease and unemployment which leads to more of incomes. This has a positive effect in terms of the poverty cycle. The aforementioned relationship between an increase in women's education and fertility rate is demonstrated by the graph below:

(In relationship to the graph above) However over time, Tanzania’s infrastructure, another domestic factor toward development, has remained relatively unchanged as demonstrated by the above graph of the overall access to improved sanitation over time. It has stayed roughly constant over the previous 20 years and has been maintained at a relatively low value.

Similarly, a graph of time against the overall access to a water source has been plotted, another statistic that indicates an improvement in infrastructure. Tanzania has been compared to another African country, South Africa. Not only has South Africa’s overall access to water increased, over the last twenty years it has remained consistently higher than that of Tanzania. This stagnation in infrastructure may suggest why, though Tanzania has been growing from an economic standpoint, in terms of development it slightly lags, and these statistics in particular would lead to a lower quality of life due to illness and disease.

Another important domestic factor for development is income inequality, measured by the Gini coefficient. The above diagram shows how Tanzania’s Gini coefficient has changed over time. A Gini coefficient of 0 means perfect equality and a Gini coefficient of 100 represents perfect inequality. Currently Tanzania is ranked as the country with the 76th highest Gini coefficient, placing it in an ‘in between’ area relative to the rest of the world. However, what is worrying is that the country’s coefficient value is gradually increasing overtime. As the income inequality grows, while there may be strides in GDP, more people will be placed in poverty due to lowered incomes, and lowered incomes will affect the poverty cycle as those in poverty cannot afford education and healthcare, decreasing their productivity which lowers incomes further. Furthermore in the long term, as inequality grows, GDP growth may also slow as there will be less saving and hence less investment, slowing down entrepreneurship and in turn economic growth.

Tanzania and its trade

Tanzania is currently undergoing a trade liberalization scheme, thus attempting to achieve export-led economic growth. This is demonstrated by Tanzania’s, along with other East African countries, involvement in the U.S African Growth and Opportunity Act where East African countries could export their produce, such as textiles and apparel goods, without being limited by quotas or tariffs. In 2015, the deal was extended to 2025, illustrating Tanzania’s interest to continue export-led growth.

Tanzania is not a country, unlike many of its continental neighbors, that over specialized in the production of a particular product. Its largest export, gold, only accounts for 21% of its total volume of exports. Therefore if the demand for gold were to fall, or if the price of gold were to drop, Tanzania’s total GDP would not suffer drastically which would not decrease the welfare of many livelihoods and unemployment would not be as affected. Additionally, Tanzania exports its goods to a variety of countries so if one of the countries it exports to were to experience an economic recession, demand for its already diversified exports would not suffer greatly.

Tanzania has a negative trade balance of -26 million USD which again suggests a relatively open economy because the country is not actively trying to switch consumption from imports to domestically produced goods. However it suggests a lack of international competitiveness in the production of certain goods. Its largest import is refined petroleum which accounts for 25% of its imports. which may not be beneficial because it is a highly inelastic good, so if the price of refined petroleum were to rise, because it is a capital good, may cause mild cost push inflation.

The African country’s main export, gold, is subject to high levels of volatility as shown by the diagram above. These fluctuations would have the effect of decreasing foreign direct investment because investors will be wary that prices could decrease and their revenues are subject to fluctuations. Because of this fluctuation, domestic firms would be reluctant to expand or invest because their revenues are subject to oscillation. This would decrease economic growth which would decrease incomes of those who worked in the gold industry.

Aid given to Tanzania

Aid: Tanzania is the second largest aid recipient in Sub-Saharan Africa. In the last decade, the aid the country has received can be categorized in terms of project aid. Donors have given payments to several sectors of the economy in an effort to diminish societal and media repression. The judicial system, civil society and the media have been targets of such aid. Particularly, aid has been given to the Media Council of Tanzania which promotes economic development because society will be more informed and educated, therefore becoming more productive and will earn higher wages as a result, so they can afford more healthcare, education for future generations and live a life of a higher quality. Therefore the poverty cycle will be broken. Funding to the legal will have a similar effect because due to foreign aid, particularly from the Nordic countries, there may be less corruption and therefore a more fair legal framework. Perhaps less people will be convicted of crimes and therefore will be able to work, earning higher salaries and breaking the poverty cycle as they are able to afford a higher standard of living through more access to healthcare and education. However, there is no telling whether the influx of money from foreign countries will do anything to decrease corruption in the judiciary system, and whether this will lead to less people getting convicted; perhaps more people would get convicted as previously, those who committed were let off due to bribes and other payments.

As shown in the diagram, most of the aid that Tanzania receives is from from the World Bank, followed by the United Kingdom. In the diagram below, we can see how the aid Tanzania accepts is distributed in the economy. Although most of the aid is for the promotion of healthcare, only 9% of it is spent on education. In a country where there is a 67.8% adult literacy rate and there is plenty of room to improve, focusing more on education is a strategy the Tanzanian government could employ. This would break the poverty cycle because as more people are educated, they would be more productive and therefore earn higher wages and would be able to afford healthcare, more education for future generations and a higher quality of life in general.

An issue with the influx of foreign aid is that as a result, the Tanzanian government abolished the 'development levy', a tax whose revenue was purposed for economic development. The tax was collected by district councils to focus development in a certain area of Tanzania. However with the removal of the tax, the government decides which councils get how much of revenue for development via general purpose grants, but this form of distribution is highly subject to corruption and the distribution mechanism is very politicized, resulting in district councils sometimes not receiving adequate funding for the purpose of economic development.

Foreign Direct Investment in Tanzania

Foreign Direct Investment (FDI) is a significant part of Tanzania's economy, comprising of 6.5% of the country's GDP. This can be attributed to the fact the country is rich in natural resources, and that is has undergone an effective privatization scheme. An example of Foreign Direct investment occurred in 2013, when the Chinese government set up and funded an 850 million Euro gas pipeline which was completed in October 2015. In 2015, a large port in the town of Bagamoyo was jointly funded by two private firms, China Merchants Holdings International and Oman Investment Fund, at the cost of 11 million USD.

However, the country's lack of transparency remains a barrier to investment. In the Transparency index, it has a value of 3.0 compared. This is lower than the average transparency of Sub-Saharan African, which is 5.0, and significantly lower than the United States, with a value of 7.0. But Foreign Direct Investment seems set to improve, due to the recent discovery of new hydrocarbon fields and an increase in the number of coal reserves from 1.5 to 5 billion.

Debt in Tanzania

The public debt in Tanzania as a percentage of its total GDP in 2015 was 40.2%, an increase since 2014 where it was 35.2%. These numbers itself to not tell much information, so we can compare values with a neighboring yet more economically thriving country, South Africa. In 2014, South Africa had accumulated a debt totaling to 47.1% of its GDP. In Tanzania, the total external debt it held in 2014 was 35.2% of its GDP whereas in South Africa, this value was 40.7%. We can see that compared to South Africa, Tanzania has a lower proportion of debt due to both its citizens and external parties. Since a lot of Tanzania's development comes from Foreign Direct Investment, not much money is needed for the government to undergo development through its own funds.

Conclusion

While Tanzania is considered a country stricken by poverty, it is an African country that has shown much progress and potential, from its diversification of exported goods to the relatively high about of foreign direct investment is accumulates. Its trade liberalization aligns with the current world view and should allow the country to continue to build trade relationships and undergo further economic growth and perhaps just as importantly, economic development. However, Tanzania still struggles with some key issues, from corruption which prevents the rightful distribution of money to districts for the purposes of development, to its seeming lack of interest in education expenditure despite its low literacy rate.

Credits:

Created with images by vasukibelavadi - "tanzania people africa"

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