The intellectual dominance of development economics explains why Tanzanian leaders adopted the ISI approach, but it does not explain why they kept it in place as long as they did, long after its harmful economic effects had become painfully visible. One reason is the absence of a compelling theoretical alternative. In its approach to developing countries, the economics profession did not begin to undergo a major paradigmatic shift until the mid- to late 1970s, some fifteen to twenty years after ISI had been firmly set in place in countries such as Tanzania. The World Bank did not produce an alternative formula for sub-Saharan Africa until the early 1980s, with the publication of its famous report, Accelerated Development in Sub-Saharan Africa.22 That report combined an analysis of the shortcomings of the ISI strategy as it had been applied in Africa and offered in its place an alternative, market-based strategy that emphasized free trade. Even then, its recommendations required several years to become the basis for specific policy recommendations by on-site donor organizations.
The principal reason for the persistence of economically harmful policies, however, was political. A downward economic spiral does not affect all social strata equally, and the political elites of many developing countries were able to insulate themselves from the environment of economic hardship. The economic interest of a country’s political elite is not the same as the social interest of the country as a whole. Tanzania was no exception. Members of the elite were able to enjoy a material lifestyle that contrasted dramatically with the hardships that affected the majority of the population. Through a combination of rent-seeking behavior and legitimate perquisites of power, such as generous fringe benefits and special allowances, members of the Tanzanian elite lived very well. This is the paradox of development first cited by Jonathan Barker in his important early article on Senegal.23 Barker’s paradox points out that reform often depends on the initiative of a class of political leaders whose self-interest lies in a continuation of the existing system, which provides the basis for their wealth and power. This paradox defines the most challenging questions arising from Tanzania’s process of economic reform: not why it began so slowly but why it began at all and why, when it did, it resulted in a successful transition to a market-based economic system.
The following chapters attempt to show that Tanzania’s program of stateled development fostered the emergence of a powerful and entrenched governing elite. The failure of its economic experiment in socialist development gave rise to the emergence of a larger and larger parallel economy, which grew in the vacuum created by the failures of the official economy. As the state industries and bureaucratic agencies that had responsibility for providing essential goods and services failed in their assigned tasks, the parallel economy began to assume this responsibility. By the time Tanzania began its official reform program, in mid-summer 1986, the parallel sector had attained such large proportions that it was almost as large as the country’s official economy and, by some estimates, even larger. Vast numbers of Tanzanians earned a sizable portion of their income in the parallel economy from which they obtained the goods and services they needed.24 Economic liberalization in Tanzania was not a matter of creating a market economy where none existed. It merely involved setting aside the remnants of an official state economy that most Tanzanians had come to view as an impediment to their most promising economic activities.
The distinctive feature of Tanzania’s parallel economy was the involvement of large numbers of public officials. This was Tanzania’s answer to Barker’s paradox. On the eve of economic reform, many members of the governing elite that presided over a socialist state had become private sector actors in the parallel economy. The economic strategy they adopted is commonly referred to as straddling, a term that describes the tendency of families to diversify their portfolio of activities to cope with conditions of stress. Tanzanians in all occupations sought income wherever they could obtain it. For many public officials, this meant finding ways to supplement their increasingly inadequate official salaries by undertaking private economic pursuits. Many civil servants had small gardens or small farms from which they sold food stuffs. Others raised chickens or goats for sale in the parallel marketplace. Some were more brazen and used their official vehicles as taxis or trucks to provide transportation services. Still others operated small business enterprises producing shoes, furniture, soft drinks, alcoholic beverages, clothing, cooking utensils, farm implements, and a host of other goods increasingly unavailable in the official marketplace. Before long, many public officials derived a larger share of their income from their side businesses than from their government salaries, whose purchasing power had shrunk due to the fall in the value of the Tanzanian shilling.
Economic straddling meant that, on the eve of policy reform, many Tanzanians had a blend of economic identities. Some of Tanzania’s most successful entrepreneurs began as public officials, deriving some of their start-up capital and an element of political security from their governmental positions. The parallel economy, however, had important limitations, especially regarding the scale of a family’s informal sector activities. It might be possible to operate a small business selling food items, chickens, or goat meat, but it would be impossible to expand those activities to take over an entire brewery, textile mill, or cigarette factory so long as those enterprises were still official state monopolies. Eliminating the state economy with its numerous monopolistic but unproductive firms represented a pathway for greater wealth, not a constraint. This was the great secret to the success of Tanzania’s liberal reforms. Much of the social pressure that drove privatization came from state officials whose positions in the government afforded them special advantages in the early privatization process.
Corruption played a major role in all these transformations. It originated in the declining purchasing power of public sector salaries and set down its roots in the countless opportunities for bribes afforded by the country’s all-pervasive system of state regulations and controls. Corruption began as an income supplement for hard-pressed public officials seeking to maintain or augment their real incomes. Over time, however, it morphed into something with far greater long-term economic consequences: it became a source of investment capital in the rapidly growing parallel sector, which had arisen in response to the scarcities of goods in official markets. Before long, public officials had become some of the country’s most active participants in the informal marketplace. They were active in all aspects of the private economy: as producers; as providers of services, such as transportation; and as sources of capital investment. Public officials had certain special advantages in becoming entrepreneurs. They had the windfall income of funds afforded by corruption and the advantage of de facto immunity from prosecution provided by their official status. There was a sort of income dynamic: government salaries provided a smaller and smaller share of their income, and the income derived from corruption and investments in parallel market businesses became a larger and larger share of what they earned.
Corruption was Tanzania’s form of early capital accumulation. Although the decreasing purchasing power of public sector salaries was a major reason government officials turned to corruption, there were other factors as well. These included a governing party leadership code that forbade party members serving the government from earning second incomes and constraints on the banking system that increasingly forced the commercial banks to lend almost exclusively to state-owned enterprises. Corruption became a major source of investible wealth. Almost imperceptibly, vast numbers of Tanzanian officials underwent a socioeconomic transformation from government employee to petty capitalist.
No other factor provides as powerful an explanation of the alacrity with which the Tanzanian elite accepted the country’s rapid transition to a market economy during the 1980s. By that time, a sizable proportion of Tanzania’s political elite had become actively engaged in the country’s market economy. For many, their government positions were a mere adjunct to private sector activity. Some could use state-provided benefits, such as government houses and cars, as assets in their private sector activity. For many, a position in the government provided preferred access to foreign exchange, an especially valuable asset in an environment where hard currency was in extremely short supply. For others, it meant the ability to use state authority to leverage a covert partnership with an established private sector enterprise.
For the more successful members of Tanzania’s new class of venture capitalists, the survival of the state economic sector, however