Determinants of capital flows to Tanzania: the 1961-1996 experience.

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University of Dar es Salaam
The subject of capital flow to less developed countries (LDCs) is increasingly attracting a lot of attention especially after the re-surgence of capital flows to this group of countries during 1990s. However, like in most other LDCs, little is known about the impact, determinants and persistence of capital flows to Tanzania. Studies done on this subject in Tanzania have tended to focus more on macroeconomic effects of capital inflows in general. Tanzania is currently re-aligning its economic policies towards attraction of capital inflows for economic development. For it to formulate compatible policies, an understanding of underlying causes of the capital flow is necessary. This is because an understanding of the causes of capital flow will enable policy makers to assign an appropriate policy instrument to a proper cause. This study is thus based on this assertion. The study surveys and analyses issues related to the causes of the flow of capital to Tanzania for the period 1961 to 1996. To carry out this investigation, the study employed both qualitative and quantitative analytical methods. The point of departure is the definition of capital flows. Thus this variable is defined hereby as a summation of debt creating loans, grants and foreign direct investment (FDI). Each of these categories of capital flow can be determined differently. While loans are said to be determined by country's creditworthiness, grants are hypothesised to be attracted into a country to fill-in the gap resulting from low domestic savings. FDI on the other hand is predicted to be determined by both domestic (pull) factors and foreign (push) factors. The study also conveniently identifies three different capital flow regimes namely, the pre-Arusha declaration period, the post-Arusha declaration period and the reform period of the 1980s. This categorisation was based on the underlying distinct characteristic of each period and its differences on the reasons for the flow of capital. The results indicate that, the country's creditworthiness has been partly responsible to the flow of capital to Tanzania. However, there is no quantitative evidence to support the assertion that low domestic savings have been responsible to the flow of grants to Tanzania. Rather, other factors including political and natural calamities seem to have greatly influenced the flow of grants to Tanzania. As for the FDI, the quantitative results have not supported the role of domestic (pull) factors. However, the fact that FDI re-emerged in Tanzania after the country had adapted to economic reform measures, it is plausible to assert that domestic factors have not been a strong influence in attracting capital in the form of foreign direct investment. To some extent the results presented here have compared quite satisfactorily with those done in other studies. However, their interpretation for policy purposes should be made with caution due to the limitations on the data that were employed. That notwithstanding, the results obtained here point to some specific policy recommendations on what can be done with regard to capital flows.
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Capital movements, Tanzania
Assey, C. S. (1998). Determinants of capital flows to Tanzania: the 1961-1996 experience. Master dissertation, University of Dar es Salaam. Available at (