The Political Economy of Tanzania. Michael F. Lofchie

be invested in industry. To reinforce this viewpoint, they assembled an entire repertoire of concepts that cast doubt on the wisdom of investing in the agricultural sector. Among other ideas, for example, the development economists stressed the low marginal productivity of labor in agriculture; the idea that labor productivity in agriculture would be less, at the margin, than labor productivity in new industries. The ideas of W. Arthur Lewis were especially influential, and his most famous research sought to show that agriculture could provide a labor supply for industry without adverse effects on agricultural production.⁴³ Benno Ndulu, today governor of the Central Bank of Tanzania, has stated Lewis’s idea succinctly: “Lewis’ seminal paper on the dual economy provided the rationale for perfectly elastic supply of labor released from agriculture where its marginal product was zero or released at a constant, institutionally set wage below the industrial wage.”⁴⁴ Those responsible for framing economic policy in Tanzania and elsewhere interpreted Lewis’s research to mean that they could siphon labor out of agriculture without adverse effects on the agricultural sector and deploy that labor to industrial production, where its contribution to economic growth would be much greater.

      One of the most influential of the development economists’ ideas about agriculture was the so-called backward bending supply curve of agricultural production. According to this notion, smallholder farmers in developing countries did not behave as income maximizers in the traditional economic sense, that is, by increasing their marketed production in response to favorable price incentives and then decreasing their production when prices fell. Instead, the development economists portrayed smallholder farmers as target workers whose participation in the marketplace was motivated by the need to have a certain level of cash income for specific purposes, such as to pay school fees for children, to purchase a bicycle or concrete flooring, or to pay local taxes or medical fees. Once farmers acquired that amount of cash, they would stop producing for the market and withdraw into a local economy of subsistence and barter. If this theory was correct, it meant that farmers benefiting from a price increase might well produce less of the good rather than more since their cash needs would be satisfied with a lower marketed volume. Similarly, if the farmers’ price for a good were to decline, they would have an incentive to produce more of the good, rather than less, in order to attain the required level of cash income.

      This concept provided the theoretical foundation for policies that increased taxes on farmers. What the development economists appeared to be saying was that governments could adopt tax measures that lowered the producers’ net return on an agricultural good without risking a falloff in production for the marketplace. This idea became a fundamental conviction among many of the economists and policy advisors involved in the development process and set the stage for the post-independence era of escalating taxes on agricultural producers. Convinced such taxes might actually yield higher levels of production, many African countries began to impose a whole set of additional taxes on agricultural products. In Tanzania, these additional taxes began with agricultural exports but quickly embraced food staples as well.

      During the 1950s and 1960s, the development economists’ prescriptions exercised a powerful influence over the policy choices of a host of developing countries, not only throughout sub-Saharan Africa but also in Latin America and South and Southeast Asia. In conception, the ISI strategy of development was simple: it reinvents the old idea of the infant industries approach that was popular in the early industrial history of the United States. The infant industries would receive an incubator of protection until they had matured into adolescent or even full-grown industries, able to stand on their own in a competitive world. Both the ISI strategy and the infant industries approach emphasize the benefits of substituting domestic industrial production for imports, and both emphasize the need to provide the new industries with trade protection during their formative phase to insulate them from international competition by more mature firms. To political leaders throughout the developing world, both in sub-Saharan Africa and in other developing regions, the key challenge for policy-makers was to find ways to transfer productive resources from agriculture to industry.

      The influence of the ISI model derived from several factors. Many of the development economists were among the most prestigious and highly regarded members of the economics profession.⁴⁵ Sir Arthur Lewis and Gunnar Myrdal were Nobel Prize winners; Albert Hirschman was a professor at Yale; Hollis Chenery, a former Harvard professor, was a vice president at the World Bank. Many major universities hired development economists to senior faculty positions and treated development economics as a vital subfield, worthy of its own faculty and eligible for its own qualifying examinations. Many economics departments tended to stream students from developing countries into this field on the premise that it would help them to make a practical contribution to their countries. On their return, many of these students took up positions in critically important government ministries where they had a direct effect on policy choice. In Tanzania, one of the most powerful vectors for the dissemination of the development economics approach was the influence of the major lending institutions such as the World Bank, and the principal bilateral donor agencies such as the U.S. Agency for International Development (USAID), which hired economists imbued with the development economics approach.