Tanzania's Experience with Trade Liberalization

• Author: Oussama Kanaan
• Position: Economist in the IMF's Policy Development and Review Department

After Tanzania's economy deteriorated during the 1970s and early 1980s, it took a series of bold steps to liberalize trade. How successful have these efforts been in improving its economic performance, and what lessons can other developing countries derive from Tanzania's experience?

Although there is a broad consensus today among policymakers on the economic costs of delaying trade liberalization, several countries-including many with socialist-type ideologies-are still clinging to inward-oriented trade regimes. The experience of Tanzania, which several decades ago had economic features these countries have today, offers them important lessons and points to some pitfalls.

The way it was

In the late 1960s, Tanzania embarked on a development strategy of substituting domestically produced goods for imports, based on the concept of "socialism with self-reliance" articulated in the 1967 Arusha Declaration. This import-substitution strategy had among its key economic objectives promoting heavy industry and achieving self-sufficiency in food production. Two main instruments were employed in implementing the strategy. First, a series of ambitious investment programs, embodied in five-year plans, targeted mainly at the expansion of the capital-intensive industrial sector and infrastructure projects; and, second, a set of large public enterprises that dominated most industries; had legal monopolies in the pricing, marketing, and processing of agricultural crops; and, by the mid-1970s, had become the country's largest importers and exporters.

Throughout the 1970s, the government used trade restrictions as key tools for achieving its development priorities. Producers of export cash crops (mainly coffee, cashew nuts, sisal, tea, and tobacco)-traditionally Tanzania's main source of export earnings-had to sell their products to marketing parastatals (quasi-governmental organizations), which offered prices well below world prices. Exporters of other, nontraditional exports had to surrender most of their foreign exchange earnings and cope with a cumbersome and nontransparent system of export permits, which required exporters to obtain a license for each consignment and effectively gave individual ministries the right to regulate a wide range of exports on an ad hoc basis. Similarly, all imports were regulated through administrative allocations of foreign exchange and an import-licensing system, both of which became increasingly restrictive toward the end of the 1970s as foreign exchange earnings declined.

Producers of export cash crops were faced with procurement prices that declined steadily, in relation to both the consumer price index and world prices. Those declines resulted from the appreciating real exchange rate, the increasing inefficiency of the marketing boards, and the government's policy shift to favoring food crops over export crops. Tanzania also experienced economic shocks that were beyond its control, such as drought and declining terms of trade. The overall result was that per capita output of export crops fell by about 50 percent during 1970-82 as the share of food production in agricultural output increased. Other (nontraditional) exports also contracted sharply during this period, owing to the pervasive administrative restrictions imposed on them. Falling export earnings soon led to foreign exchange shortages, and the consequent drop in imports of intermediate goods and raw materials led to sharp cutbacks in production, especially in the highly import-dependent industrial sector, and to a deterioration in the country's infrastructure.

The distorted incentive structure in the tradable goods sector and its consequent contraction worsened Tanzania's...