Foreign assistance and economic development : the case of Tanzania

Like most Less Developed Countries, Tanzania, is constrained in her development goals by savings, investment and foreign exchange bottlenecks. These have, in turn, persistently continued to impair her development goals, It is now recognized that the availability of capital would have helped to ease the mentioned constraints. But, sufficient capital for development needs cannot be generated within Tanzania because the country is poor and foreign assistance hash in the course of trine, become an increasingly important source of capital for Tanzania and, indeed, for most LDCs. The theoretical setting has been that the inflows of assistance enable the recipient country to loosen the prevailing constraints by filling the resource gap thereby helping it to reach targeted growth rates. According to this theory, the inflows are supposed to be positively related to recipient's key variables, such as savings, investment and GDP growth rates. The mid-to-late 1960s witnessed an upsurge of literature that has either strongly supported or opposed this theoretical claim by using empirical evidence. Hence, the debate on the effect of foreign assistance on the mentioned variables goes on, and is at best inconclusive. Inflows of assistance to Tanzania in particular have attracted many writers whose claim has been that the inflows were obtained at relatively "better" terms compared to other LDC recipients. Trends and patterns in the inflows of assistance to other Less Developing regions observed in this study validate this claim. But no serious study has quantitatively analysed the impact of this assistance on Tanzania's savings, investment and GDP growth rates despite its importance. It is against such a background that our study takes to fill this analytical gap. This study defines assistance in terms of grants and soft loans and employs the period 1966 - 1982 as the sample period. The analysis is done by the widely used simultaneous equations model which is estimated by the conventional Two Stage Least Squares (2SLS) technique. The regression results obtained support the claim that the inflows substitute for the available domestic savings, but complement the investment and GDP resources. The multiplier analysis shows that the perceived variables were inelastic to changes in the inflows of assistance. These results compare favourably with, among other results, those of Gupta (1975 ) and Hyuha (1984 ) which were observed in countries with similar economic characteristics to those of Tanzania. In the light of the above findings two main policy implications can be drawn first, efforts should be made on domestic saving mobilization such that the acquisition of assistance complements the domestic saving effort. Secondly, the inflows should be used for investment purposes. The present Study has, therefore, pointed to an area within which subsequent research work may be concentrated .Much remains to be done in terms of analysing the importance and impact of foreign assistance on Tanzania's overall economic development.