ESAMI

Executive MBA Programme

MASTER RESEARCH PROJECT PAPER

CANDIDATE No 15 EDA 8891-HANDLEY MPOKI MAFWENGA

i i

CONTENTS

DECLARATION

ACKNOWLEDGEMENT

CHAPTER 1

INTRODUCTION AND BACKGROUND

1.1 BACKGROUND OF THE STUDY .......................................................................................................... 5

1.2 STATEMENT OF THE PROBLEM ......................................................................................................... 8

1.3 OBJECTIVES OF THE STUDY ........................................................................................................... 10

1.3.1 Broad Objective of the Study…………………………………………………….................12

1.3.2 Specific Objectives of the Study…………………………………………………………....12

1.4 RESEARCH QUESTIONS .................................................................................................................. 11

1.5 RESEARCH HYPOTHESIS ................................................................................................................. 11

1.6 SCOPE AND LIMITATION OF THE STUDY ........................................................................................ 12

1.7 SIGNIFICANCE OF THE STUDY ........................................................................................................ 12

CHAPTER 2

LITERATURE REVIEW

2.1 THEORETICAL AND EMPIRICAL LITERATURE REVIEW ................................................................... 13

2.2 THE CONCEPTUAL FRAMEWORK ................................................................................................... 22

2.2.1 THEORIES OF FOREIGN AID ....................................................................................................... 22

2.2.2 SAVING GAP MODEL ................................................................................................................. 23

2.2.3 FOREIGN EXCHANGE GAP MODEL ............................................................................................ 24

2.2.4 FOREIGN AID IN TANZANIA ....................................................................................................... 25

2.2.5 EMPIRICAL EVIDENCE ............................................................................................................... 25

2.2.6 CURRENT STATUS ON PARTNERSHIP, AID COORDINATION AND HARMONIZATION .................. 26

2.2.7 INTEGRATING DONOR FUNDS INTO THE GOVERNMENT BUDGET SYSTEM ............................... 27

2.2.8 FOREIGN AID IN THE LONG RUN ............................................................................................... 28

2.2.9 SUSTAINABILITY ........................................................................................................................ 29

2.2.10 CAPACITY BUILDING FOR AID COORDINATION AND EXTERNAL RESOURCE MANAGEMENT ... 30

2.2.11 NATIONAL DEVELOPMENT POLICY FRAMEWORK ..................................................................... 31

2.2.12 SOURCES AND RECIPIENTS OF AID ............................................................................................ 33

2.2.13 INSTITUTIONAL SET-UP FOR PROMOTING DONOR/AID COORDINATION AND HARMONIZATION

33

2.2.14 CONSTRAINTS, CHALLENGES AND THE WAY FORWARD ........................................................... 34

2.2.15 KEY CHARACTERISTICS OF BUDGET SUPPORT .......................................................................... 38

i i i

2.2.16 EXPECTATIONS FROM THE BUDGET SUPPORT ........................................................................... 39

2.2.17 THE RATIONALE FOR GENERAL BUDGET SUPPORT ................................................................... 40

2.2.18 FOREIGN AID IN TANZANIA ....................................................................................................... 41

2.2.19 CAPACITY BUILDING ................................................................................................................. 43

CHAPTER 3

RESEARCH METHODOLOGY AND WORKING DATA

3.1 RESEARCH METHODOLOGY ........................................................................................................... 44

3.1.1 RESEARCH DESIGN .................................................................................................................... 44

3.1.2 REASONS OF CHOOSING A CASE STUDY DESIGN ....................................................................... 44

3.1.3 AREA OF STUDY ......................................................................................................................... 45

3.1.4 POPULATION .............................................................................................................................. 45

3.1.5 WORKING DATA ........................................................................................................................ 45

3.1.6 METHODS OF DATA COLLECTION ............................................................................................. 45

3.1.7 PARTICIPATORY OBSERVATION ................................................................................................. 46

3.1.8 IN-DEPTH INTERVIEWS ............................................................................................................... 46

3.1.9 QUESTIONNAIRES ...................................................................................................................... 46

3.1.10 REVIEW OF DOCUMENTS ........................................................................................................... 46

3.1.11 DATA PROCESSING AND ANALYSIS ........................................................................................... 47

3.1.12 THEORETICAL MODEL ............................................................................................................... 47

3.1.13 CONCEPTUAL FRAMEWORK ....................................................................................................... 48

3.1.14 VARIABLES AND MEASUREMENTS (DEFINITION OF VARIABLES) ............................................. 49

CHAPTER 4

EMPIRICAL RESULTS

CHAPTER 5

CONCLUSION AND POLICY IMPLICATIONS

5.1 INTRODUCTION............................................................................................................................... 58

5.2 SUMMARY OF THE FINDINGS .......................................................................................................... 58

5.3 POLICY IMPLICATIONS ................................................................................................................... 58

5.4 CONCLUDING REMARKS ................................................................................................................ 60

REFERENCES: .......................................................................................................................................... 61

APPENDIX……………………………………………………………………………………..................63

iv

DECLARATION

I, Handley Mpoki Mafwenga, do hereby declare that I am the sole author of this dissertation, that

during the period of registered study I have not been registered for other academic award or

quantification, nor has any of the material been submitted wholly or partly for any other award.

This dissertation is a result of my own research work, and where other people‟s research was

used, they have been dully acknowledged.

Date…………………………………………………………….Signature…………………………

CANDIDATE

Date ……………………………………………………………Name………………………….....

SUPERVISOR

v

ACKNOWLEDGEMENT

In writing this Research paper, I owe intellectual debt to the Eastern and Southern African

Management Institute which examined, reviewed, and commented on the entire manuscript and

sought the importance of the Research work for the MBA degree and therefore provided the

preliminaries and necessary directives to go about doing this Research. Special thanks are due to

the Country Coordinator Mr. Morrel S.J.K, ESAMI Business School Administrator Fredrick

Majariwa and Gloria Mdenye who enabled the speedy completion of this work. I would like to

thank the Management of the Ministry of Finance that facilitated accessibility of information.

Another special thanks are hereby extended to my family particularly my wife Bertha and my

sons Alvin Handley, Clerick Handley, Malcom Handley, and Issack Handley for their moral

support towards the completion of this Research. Ultimately and foremost, I would like to thank

God for spiritual support during the entire period of my research work.

5

CHAPTER 1

INTRODUCTION AND BACKGROUND

1.1 Background of the Study

The Foreign aid is one of the major policy instruments of international cooperation that aims at

transferring critical development oriented resources from the North to the South. Large amounts

of aid have been disbursed and long traditions of aid dependency have been established.

The government receives foreign aid under modalities of threefold; namely i) General Budget

Support (GBS), ii) basket funding and iii) direct project funding. GBS goes directly into national

budget, while basket funds are set aside by Developing Partners for a particular sector or

programme. Project funds support specific, often donor-led projects, which are sometimes

outside normal government budget processes. It should bear in mind that, many Developing

Partners provide also support to non-state actors, such as Non-governmental Organizations,

Community-based Organizations, or the private sector.

In the past years basket funding and direct project funding have been very popular compared to

the general budget support. During that period of implementation basket funding and project

funding have shown certain shortcomings.

Basket funding has experienced the following shortcomings:

They have created unnecessary parallel implementation systems and structures as

well as financing mechanisms, thus adding transaction costs to the Government;

They have limited the degree of Government ownership over resources allocation

across and within sectors and reforms;

Lack of complete and comparable information across sectors and reforms has created

difficulties in reducing duplication of activities and maximizing complementarities.

Direct project funding has experienced the following shortcomings:

Projects have often lacked transparency and Development Partners supporting the

projects have been better informed about their implementation than the Government

and other domestic stakeholders. Hence, accountability to Developing Partners has

been given priority over domestic accountability;

6

The setting up of costly Project Implementation Units parallel to Government systems

and structures have undermined Government structures and systems and prevented

project sustainability;

The dominance of foreign project financing which continues to predominantly reflect

the priorities of Developing Partners has limited and undermined the discretion that is

available to the Government to allocate funds in accordance with national priorities.

This in turns has prevented the Government from taking full and effective ownership

and leadership in managing the development process.

In the 1990‟s crises occurred that partially interrupted the relationship of aid cooperation. For

instance in 1994 a crisis occurred when donor (particularly IMF) concerns over poor fiscal

discipline, corruption and tax evasion led to a freeze of programme aid and structural adjustment

programmes. It also coincided with the completion of a series of donor specific aid evaluation

reports; generally with negative assessment of aid effectiveness. Donors and the government of

Tanzania have worked very hard to repair relations that had become severely strained.

Appointment of independent advisers in mid-1994 under the leadership of Prof. Gerald K.

Helleiner has been one of the efforts into repairing the government-donor relationship. The

Consultant report (The Helleiner Report) examined the relationship between donors and the

government of Tanzania and set out a list of 22 recommendations for improvement on the basis

of transparency, predictability and trust, as well as steps to be taken by the Government with the

assistance from the donor community in order to strengthen its internal systems and processes.

Most of these initiatives constituted conditionalities for much needed balance of payment and

budget support, particularly as provided by the IMF and World Bank. Finally in the year 2000, as

an outcome of Helleiner Report a consensus was reached to improve aid coordination, promote

harmonization and strengthen government ownership of the development processes.

Tanzania Assistance Strategy (TAS) was launched in the 2002 as a unique initiative that resulted

from a joint understanding between the Government and Development Partners that there is an

urgent need to improve the efficiency and effectiveness of external resources in order for

Tanzania to achieve its development goals laid out in the National Vision 2025 and the National

Strategy for Growth and Reduction of Poverty (NSGRP) / MKUKUTA. TAS continued to be

7

monitored by an Independent Monitoring Group (IMG), which advised on progress every two

years, formulating recommendations to Government and Development Partners on further

improvements.

TAS outlined 13 principles of „best practices‟ in development co-operation on how to strengthen

national ownership and improve aid delivery and these are listed below:-

i. Government leadership in developing policy priorities, strategic frameworks,

and institutionalised co-operation mechanisms in various areas/ sectors.

ii. Government involves civil society and the private sector in developing

national policies, strategies, and priorities.

iii. Government prioritises and rationalises development expenditures in line with

stated priorities and resources availability.

iv. Integration of external resources into the strategic expenditure framework

v. Integration of reporting and accountability systems.

vi. Adequacy in resource disbursements relative to prior commitments.

vii. Timing of resource disbursements is responsive to exogenous shocks to the

Tanzanian economy.

viii. Donor policies complement domestic capacity building.

ix. Firm ODA commitments are made for longer time periods.

x. Improvement in public financial management by Government.

xi. Government has created an appropriate national accountability system for

public expenditure.

xii. Ministries, regions and districts receive clean audit reports from the Controller

and Auditor General.

xiii. Transparency in reporting and accountability at the national and sectoral.

A TAS Action Plan specifies concrete actions in four priority areas to be undertaken by the

Government of Tanzania and Development Partners namely:

i. Increasing the predictability of aid flows,

ii. Integrating external resources into the Government budget and exchequer

system,

iii. Harmonising and rationalising processes and

8

iv. Improving national capacities for aid coordination and external resources

management. (See box 1)

The idea to formulate a Joint Assistance Strategy for Tanzania (JAST) was born in the process of

rationalisation and harmonisation, as the Government and its DPs aimed to further reduce the

still high transaction costs that are incurred through the pursuit of different strategies with

multiple and often overlapping processes; despite the progress made under TAS. In addition, the

Government and the DPs intended to establish a Joint Assistance Strategy in order to extend

progress in enhancing national ownership and Government leadership of the development

process to all levels of society and the Government respectively and to increasingly shift

Government accountability from DPs to domestic stakeholders.

Thereafter, we have the Joint Assistance Strategy (JAST) of which in comparison to TAS, JAST

is more comprehensive, going beyond the 13 best practices and four priority areas of TAS and

covering all aspects of the developing partnership between the Government and DPs as well as

the role of Non state actors (NSAs) therein. It has meant to contribute to sustainable development

and poverty reduction in line with the National Vision 2025 and the Zanzibar Vision 2020 by

consolidating and coordinating Government efforts and DPs support under a single Government-

led framework to achieve results on the National Strategy for Growth and Reduction of Poverty

(NSGRP/MKUKUTA) and the Zanzibar Strategy for Growth and Reduction of Poverty

(ZSGRP/MKUZA) as well as other national development and poverty reduction programmes.

Basically GBS is a coordinated and harmonized way of aid financing, which is provided to

Tanzania by 14 Development Partners to directly support the implementation of the MKUKUTA

through the Government‟s budget.

1.2 Statement of the Problem

Developing countries including Tanzania rely heavily on external resources to finance their

development programmes due to inadequate local resources which to a large extent has narrow

tax base and shallow non-tax revenue yields. The experience shows that the finance provided to

these countries do not generate the economic growth as expected and most of the borrowing

decisions that are predicated for growth do not achieve the intended objectives which

consequently lead to debt-creating financial flows. The impetus for this has been the

9

unsustainable debt crisis which has hampered development efforts and sucked resource away

from expenditure on health, education, water and sanitation, and economic infrastructures.

On the other hand, the experience of a number of fast–growing East Asian newly industrialized

economies (NIESs), and recently China, has strengthened the belief that attracting FDI is

significant to bridge the resource gap of developing countries and avoid further build–up of debt.

Therefore, opening up of the economy in order to attract massive inflows of FDI in a host

country is imperative. It is believed that FDI brings not only more stable capital inflows but also

greater technological know–how, employment opportunities and managerial skills hence

accelerating pace of economic growth and development.

The Government of Tanzania has adopted GBS aid modality, as it is facilitate effective aid

management, which is the key in attaining poverty reduction goals in the country. Consecutively

the GoT has adopted the MKUKUTA strategy as its homegrown strategy to tackle poverty and

boost economic growth. In order for GoT to meet the objectives set out in the MKUKUTA and

to implement its reform agenda, international donors (Developing Partners) are providing funds

directly to the Government. This enables the Government to allocate foreign resources according

to national priorities for the development of the country and benefit of the citizens of Tanzania.

Developing Partners are thereby supporting the Government in fulfilling its leading role in the

development of Tanzania. GBS also builds on the understanding that giving resources directly to

the government reduces the amount of time and resources spent by government to meet the entire

different requirement for different projects and different Developing Partners.

The principle behind general budget support in Tanzania is that the government to reach the

goals of the MKUKUTA uses the resources. These goals are set around achieving broad based

and equitable growth, improving the quality of life and social well-being, with particular focus

on the poorest and the most vulnerable groups, and improving good governance and

accountability. This means that the government is investing into improving various aspects of the

lives of the poorest Tanzanians, such as ensuring better education and healthcare, higher incomes

and more accountability of leaders towards their constituents. Budget Support contributes to

these efforts.

10

1.3 Objectives of the Study

1.3.1 Broad Objective of the Study

Broadly the objective is to investigate the Effectiveness of foreign aid in budget support in

Tanzania that has to be reflected in the FDI. The main objective of this study therefore is

intrinsically to assess impact of FDI inflows on economic growth and poverty reduction in Sub–

Saharan Africa and to find the impact of foreign aid on economic growth in Tanzania

1.3.2 Specific Objective of the Study

The specific objectives are:

(i) Identify institutional and macroeconomic conditions of SSA economies,

(ii) Evaluate the trends and patterns of FDI inflows and the state of poverty,

(iii) Assess the link between FDI inflows and economic growth on the one hand

and growth–poverty relationship on the other hand,

(iv) Provide policy implications for sustainable economic and social

development in SSA.

(v) To find out whether there is a positive relationship between foreign aid and

economic growth.

(vi) Investigating other variables which affect economic performance such as

export, investments (private sector capital formation) and weather.

(vii) To asses other influencing factors.

The Specific objectives go in tandem with the:

a) Determination of the objectives and positive effects of GBS;

b) Assessment of the challenges in implementation of NSGRP/ MKUKUTA by

using GBS as an aid modality;

c) Assessment of the level of Donor dependency in national budget; and

d) Assessment of the sustainability of NSGRP when donor support is wound up.

The World Bank analysis on poverty situation in Africa shows that Africa as a whole and Sub–

Saharan Africa (SSA) in particular, has been on periphery of the FDI inflows compared with

other regions. On average, 45 to 50 percent of population in SSA lives below the poverty line.

Currently, the availability and state of social services in most of these countries is the poorest in

the world. Sluggish economic growth has translated into an increase in both poverty rate and the

11

numbers of poor people with the largest proportion are living below $1 a day (World Bank,

2001).

1.4 Research Questions

Given that growth is the most important factor affecting poverty reduction in developing

countries implies that growth is good for the poor people. In this vein, this study seeks to

examine the impact of FDI inflows on sustainable economic growth and poverty reduction in

Sub–Saharan Africa by seeking answers to the following questions:

(i) What relationship exists between FDI inflows and economic growth?

(ii) Is FDI Growth-enhancing in Sub-Saharan Africa?

(iii) Is there any positive effect of growth on poverty reduction? Alternatively is a

Growth–enhancing induced by FDI pro–poor?

(iv) Do institutional factors and macroeconomic policies act as desirable inputs in

enhancing growth and poverty reduction? and

(v) What precautions should policy makers observe when endeavoring to attract FDI

inflows in Sub-Saharan Africa?

(vi) What are the objectives, positive effects of GBS?

(vii) What is the level of donor dependency in the national budget?

(viii) What are the challenges in implementation of NSGRP by using GBS as an aid

modality?

(ix) What is the level of sustainability of NSGRP when donor support is wound up?

(x) Is there any positive relationship between foreign aid and overall economic

growth in Tanzania?

(xi) Are private sector capital formation and GDP growth positively related?

(xii) Are exports and GDP growth positively related?

(xiii) Does favorable weather condition contribute positively to GDP growth?

1.5 Research Hypothesis

The following hypothesis is tested from 2000 to 2007

a) Foreign aid (Loans, Grants) to Tanzania influenced positively GDP growth.

b) Private sector capital formation and GDP were positively related.

c) Exports and GDP growth were positively related.

d) Favourable weather condition contributed positively to GDP growth.

12

1.6 Scope and Limitation of the Study

Tanzania under the current setting has two governments, the Government of the United Republic

of Tanzania and the Revolutionary Government of Zanzibar, each with its own budget. In order

to pursue any national procedures and systems for external aid, both governments need to be

involved. This study however covers only the Ministry of Finance and Economic Affairs of the

Government United Republic of Tanzania, Dar es Salaam. The study is also confined to foreign

aid as defined by Development Assistance Committee (DAC). It uses data disaggregated into

loans, and grants. It includes other variables such as weather condition, export and private sector

capital formation.

It also covers a period of five years from 2000 to 2007 because it is during this period that the

Government of Tanzania has instituted several economic reform programs for development and

worked on improving the aid relations with the development partners.

1.7 Significance of the Study

One of the requirements for the award of Master of Business Administration at ESAMI and the

researcher is accomplishment of the thesis of which this thesis has been in a position to assess

and understand the role played by donor agencies in poverty reduction through general budget

support and to assess the sustainability of NSGRP under the general budget support without

donor funds.

The study is useful source of information to other researchers interested in the research of similar

nature or discipline and make the researcher more exposed to policy analysis environment. It is

broaden the understanding of impact of foreign aid on economic growth in Tanzania and the

findings is be of interest to anyone involved in the budget process or seeking to influence it.

13

CHAPTER 2

LITERATURE REVIEW

2.1 Theoretical and Empirical Literature review

Tanzania's history of development cooperation dates back to the early 1960s when external

financing policy was broadly derived from socio-economic policies spelt out in the ARUSHA

Declaration of 1967 and from Tanzania's policy of Socialism and self-reliance. The main

external finance guidelines were based on the fact that Tanzania recognized the role of external

finance in bringing about the intended Socialist Development. Because of Tanzania's limited

capacity to generate adequate domestic resources, external aid should be encouraged, in order to

complement the country's own resources.

However, for reasons beyond the scope of this paper, the intentions of the Arusha Declaration to

make Tanzania self-reliant were not realized. As a result, the country continued to be sustained

by foreign aid in order to meet development expenditure. Thus, foreign aid has played, and is

continue to play; a big role in the Tanzanian economy. It is estimated that, since 1990, the annual

aid flow to Tanzania has averaged around US$1 billion, at today's prices.1

The theoretical basis of growth model in development economics has relied greatly on two

frameworks, the Harrod-Domar model and Solow model. These models have been highly

renowned and recognized as a breakthrough in economic thought. The Harrod-Domar model

posits that the expansion of output linearly relates to the increase in the stock of physical capital.

In contrast, the Solow model output depends on three basic factors: the expansion of the

physical, the growth of effective labour force and the rate of technical progress.

In addition to facilitating advances in the conceptual frameworks, these models have played a

substantial role in empirical analysis. The Harrod-Domar model has often been used to compute

the amount of investment required to generate envisaged amount of output growth. Unlike the

prescriptive nature of the Harrod-Domar framework, the Solow model has been oriented toward

generating rates of economic growth into amounts that can be accounted for by investment in

physical capital, human capital, and technological change (Isard, 2005).

14

In endeavouring to account for growth and rate of convergence based on steady-state analysis,

the technological change is the only possible source of per capital output growth in the long run.

It is further argued that countries do not have the same saving rate, depreciation rate and

population growth rate; therefore different convergence levels are expected. These ideas have

brought in the hypothesis of conditional convergence according to which countries converge to

their own growth paths and their overall economic growth rate depending on the growth rate of

the technology of the country.

In the same way, Barro (1991) finds evidence that helps to explain why it is possible for

countries to diverge in per capital income due to the differences in human capital. However,

despite the importance of widely established traditional growth accounting literature which focus

on the main proximate causes of growth, including physical capital, human capital and total

factor productivity, together with macroeconomic policies, a great deal of economic research in

recent years suggests that institutions are vital for economic growth and development. It has been

found that differences in per capita GDP around the globe ranging from about $100 a year in

Sub-Saharan Africa to over $40,000 in advanced economies are closed related to institutional

quality (IMF, 2003). North (1994:360) defines institutions clearly: Institutions are the humanly

devised constraints that structure human interaction. They are made up of formal constraints

(e.g., rules, laws, constitutions), informal constraints (e.g., norms of behaviour, conventions, self-

imposed codes of conduct), and their enforcement characteristics. Together they define the

incentive structure of societies and specifically economies. This definition distinguishes

institutions from organizations, although in most countries various organizations warrant

inclusion among the important institutions that define the incentive structures of economic

agents.

More importantly, institutions are the devices individuals create to maintain order, social lives or

rules, enforcement characteristics of rules and norms of behaviour that structure repeated human

interaction. It is commonly accepted that the key role of the institutions is to reduce transaction

costs incurred in conducting an economic exchange. It also seems clear that success in sustaining

economic growth depends critically on how well institutions adapt to permit low-cost

15

transactions in the impersonal markets that characterize productive economies. In this context, it

is adaptive rather allocative efficiency which is the key to long-run growth (Isiamson, 1995).

In addition, economists have for a long time emphasized the allocative efficiency associated with

market systems. Decision making based on prices that equilibrate supply and demand in

competitive markets can provide an efficient way of allocating resources in economies. Market

mechanisms allow workers with different skills and firms managed by different individuals to

pursue their comparative advantages in production. However, experience has also demonstrated

that market systems in which many economic agents have opportunities and incentives to

innovate provide a relatively high degree of adaptive efficiency. In the same way, there is

widely-spread agreement that in order to adapt efficiently and function well in generating

economic growth, market economies require various types of institutions and a significant

amount of public sector involvement.

It is worthy however, emphasizing that most of the recent work on institutions and economic

growth has focused on the importance of a particular set of institutions. In this regard,

institutions can be divided into four types namely market creating, market regulating, market

stabilizing, and market legitimizing. In particular, growth requires institutions that create markets

by defining property rights and enforcing contracts; institutions that regulate markets and correct

market failures; institutions for stabilizing markets through the exercise of monetary and fiscal

policies and through prudential regulation and supervision; and institutions for legitimizing

markets through the provision of political voice and social safety nets.

It has been further suggested that each type of institution is important for sustaining economic

growth momentum, build resilience to shocks, and facilitate socially acceptable burden sharing

in response to such shocks (IMF, 2005 and Rodrik, 2003). In general, the most relevant

institution-building priorities and forms of institutions are country specific. Whereas most

countries can benefit from many types of institutional reforms, governments face difficult

choices on how to establish well functioning institutional structures for sustaining economic

growth as emphasized by North (1994) because countries have different informal norms and

enforcement mechanisms, thus, precautions need to be taken given that the formal institutional

structures that work well for one country may not adapt well to other.

16

Furthermore, according to traditional neo-classical growth model, the extent to which FDI affects

output growth is limited with diminishing returns to physical capital. In this case, FDI can only

affect the level of income, leaving the long-run growth rate unchanged. Many scholars have

extensively devoted their time to analyse positive effects of FDI on economic growth in

developing countries given that FDI brings with it capital stocks, technology, managerial skills

and organization arrangements, hence affecting output growth in the long run through increasing

returns in the production process via spillover effects. If technology diffusion effects to the host

country impact strong and positive spill over to the local firms, FDI inflows is transform the

recipient country output from low steady state to a new steady state with higher induce-growth

rates and sustain their long-run growth permanently (De Mello, 1997).

It is worthy also noting that according to Multinational Corporations (MNCs) perspectives, FDI

is considered to be the outcome of corporate strategies and investment decisions. In this case,

institutional features of the recipient country are important determinants of FDI, including the

degree of political stability and the extent to which the government intervenes in the economy,

the level of implementation of property rights, limitation on foreign ownership and domestic

profit tax system and also efficiency of bureaucratic procedures.

Research over the past decade has provided strong convincing evidence of the importance of FDI

inflows in promoting economic growth. The existing empirical studies on the causal relationship

between FDI and economic growth using time series or panel data have found that this relation is

homogeneous because FDI is assumed to have strong positive effect on growth in developing

countries. However, given that the relationship between FDI and growth may be complex and

heterogeneous across countries, in this case, (Nair-Reichert and Weinhold, 2001) found

heterogeneity in the causal relationship between FDI and growth by using mixed fixed and

random model (MRF) in the panel data set of 24 developing countries over 25 years. Their result

was contradictory from the long-established panel estimators which assumed homogeneity effect

of FDI across countries. Furthermore, the study found that the relationship between investment

both foreign and domestic and economic growth in developing countries was extremely

heterogeneous.

17

In the same vein, (Li and Liu, 2004) found significant results supporting the assumption that

there is strong complementarities of FDI and growth arising from the fact that positive effects of

FDI may enlarge market size which in turn attracts further FDI. Using a panel of data set from 84

developed and developing countries over the period of 29 years, they detected endogeneity of

FDI and economic growth which occurred in the second half of the sample in particular mid of

1980s and not from the whole sample period. Further, Li and Liu conducted a test to see whether

FDI affects growth alone or through interactions. The result showed strong positive interaction

effects of FDI with human capital, infrastructure and technology gap.

In addition, a strong empirical association between FDI and economic growth in export-

promoting than import-substituting countries was emphasized by (Balasubramanyam et al.,

1996). This finding implies that impact of FDI varies across countries and that trade policy can

affect the role played by FDI in economic growth. UNCTAD (1999a) found that FDI had either

positive or negative impacts depending on the variables that are entered alongside it in the model

equation. These variables includes the initial per capita GDP, education level, domestic

investment ratio, political instability, terms of trade, black market premium, and the financial

development.

In the same way, (Borensztein et al., 1998) found that FDI contributes more to economic growth

only when the host country has a minimum threshold stock of human capital. In their view,

differences in technological absorptive capability may contribute to the variation in growth

effects of FDI across countries. In their analytical framework, it was found that the quality of

human capital determines the rate and ability to absorb foreign technology. Thus, abundance and

state of human capital are assumed to induce higher growth rates given the amount of FDI

inflows. Borensztein and his colleagues‟ argument is strongly supported by their empirical

findings.

Moreover, the study suggests that a minimum threshold of human capital must be attained in

order for a country to experience positive effects of FDI inflows. Similarly, Carkovic and Levine

(2002) found that after controlling the factors that jointly determined growth, FDI inflows,

country-specific factors, and other growth determinants, the data set did not suggest a strong

18

independent influence of FDI on growth. However, this finding does not dispute the fact that the

types of policies and institutions that are conducive to growth are also conducive to FDI.

Durham, (2004) did not identify a positive relationship between FDI and economic growth using

data on 80 countries for the period 1979-1998, but as an alternative suggested that absorptive

capacity of host country could determine effect of FDI on economic growth.

In addition, recent empirical works have provided strong association between institutions and

economic growth by considering three measures of institutions namely the aggregate governance

index, property rights and constraints on the executive (Kaufmann et al., 1999). In particular,

quality of governance index includes the voice and accountability, political stability and absence

of violence, public sector efficiency, regulatory burden, rule of law, and freedom from graft.

These measures are important in promoting good governance by encouraging institutional

arrangements that guard against corruption, promoting rule of law, and also creating a

meritocratic public service. Moreover, economic principles suggest that productive efficiency

which defines property rights and enforceable contracts and also institutions that place limits on

the president and other political leaders are immensely crucial to spearhead and sustain economic

growth and development.

In the same vein, Keefer and Knack (1997) researched on the effects of the poor institutional

quality on unconditional convergence among countries with special focus on inadequate legal,

political and regulatory frameworks. They assumed that poor and malfunctioning institutions

may interfere with growth, by enabling entrepreneurs to succeed because of political rather than

economical criteria. In their analysis they found that the extent to which developing countries

were relatively backward when compared with developed countries depended on the degree of

property rights protection and also the degree to which laws and regulations were fairly applied.

Furthermore, empirical research work over the past decade has provided convincing evidence on

the linkages between economic growth, institutional quality and economic policies.

Experience has demonstrated that quality of institutions affect economic growth via its choice of

macroeconomic and trade policies, such as outward orientation, financial liberalization,

19

exchange rate flexibility, macroeconomic stability, and labour market flexibility (Asian

Development Bank, 2002).

Unarguably, it has been found that economic growth is for the most part important factor

affecting poverty reduction in developing countries. Moreover, it has been widely known that

there are two types of poverty defined as absolute or relative poverty. Absolute poverty involves

comparison of incomes or expenditures of households with some established pre-determined

standards. Absolute poverty is measured using indicators such as the headcount index and related

measures. Relative poverty involves a comparison of incomes or expenditures of poor

households with those of the rich. It is measured by indicators such as Gini coefficient among

others (Warr, 2005). However, under a common definition of what constitutes poverty still there

are major disagreements among scholars on to what extent of poverty has been changed over

time and how to measure the magnitude of that change.

Furthermore, it has been widely established theoretically and empirically that economic growth

is a means under which abject poverty can be reduced in order to meet the Millennium

Development Goals by 2015 for two reasons. First, economic growth directly reduces income

poverty for many households, increasing their savings and freeing resources for investment and

also expands human capabilities of poor people. Second, economic growth tends to increase

government revenue as most investments in human development such as health, nutrition,

education and infrastructure come from public spending. But, while economic growth is

necessary for increased public spending on building human capabilities, it is hardly sufficient.

Some governments neglect investment in economic and social services provision among

population groups thus weakening the potential benefits that the overall growth can provide in

reducing poverty. In this regard, there is intense debate on the extent to which the poor benefit

from this growth.

In the same context, there has been increasing interest on the question of whether the poor

relative to other segments of society share the benefits of growth proportionally. One strand of

empirical research analyzes the cross-country relationship between economic growth and per

capita income of individuals in the first quintile of the distribution. Using the same data set and

similar econometric techniques, Adams (2003) estimated growth elasticity of poverty to be –2.0

20

and –3.0. This means a 10% increase in economic growth is result into 20–30% decrease in

poverty. But, Adams (2004) argues that growth elasticity of poverty is depend on how growth is

measured. If economic growth is measured as mean income, there is a strong negative link

between growth and poverty. Similarly, if economic growth is measured as changes in GDP per

capita the growth–poverty relationship is weaker. In the same way, Roemer and Gugerty (1997)

and Dollar and Kraay (2002) estimate the growth elasticity of per capita incomes of the poor to

be one, implying that growth in average income leads to a one-for-one increase in the incomes of

the poor.

The second strand of literature examines the effect of economic growth on absolute poverty.

Ravallion (2000) and Ravallion and Chen (1997) found that the elasticity of the poverty

headcount ratio was greater than two when average income increased by 10 percent, the

proportion of poor declined by more than 20 percent.

Other studies define a situation in which incomes of the poor grow at a higher rate when

compared with non-poor. According to this definition, the absolute living standards of the poor

may rise even when there is no relative change in income distribution. In addition, Ravallion and

Chen (2003) propose this definition and apply it to a particular poverty measure known as the

Watts index. However, Kraay (2004) applied the standard poverty decomposition techniques to

identify three potential sources of pro–poor growth namely a high rate of growth of average

incomes, a high sensitivity of poverty to growth in average incomes and a poverty-reducing

pattern of growth in relative incomes in household survey data for a large sample of countries in

the 1980s and the 1990s. The results showed that a high rate of growth of average income and a

poverty-reducing pattern of growth in households of relative incomes were empirically relevant.

Further, in the medium and long run, cross-country differences in growth in average incomes are

the dominant factor explaining changes in poverty. Thus, these decomposition results indicate

that the search for pro–poor growth should begin by focusing on determinants of growth in

average incomes.

It is worthy, however emphasizing that many scholars have tried to define growth which benefits

the poor; that is, pro-poor growth as labour intensive when accompanied by policies and

21

programmes that reduce income inequality and generate income and employment opportunities

for the poor people in particular women and other excluded groups in the society (Asian

Development Bank, 1996). In the same way, Goudie and Ladd (1999) suggest that analysis of the

link between economic growth and poverty reduction needs to integrate the distributional effects,

which may make the overall growth process to be more or less pro-poor over time. Similarly,

World Bank (2001) observes that the extent of poverty for a given rate of growth depends on

how the distribution of incomes changes with changes in growth and on initial inequality, level

of productive asset and access to opportunities which allow the poor to share the benefits of

growth.

Retrospectively, the policy concern related to poverty reduction among multilateral organizations

can be traced as far back as 1970 when the United Nation‟s Committee for Development

Planning declared that the efforts needed are best characterized by what is sometimes called the

necessary war on poverty (United Nations, 1970). The Committee declared poverty reduction

through accelerated development, improved income distribution, and other social changes as a

paramount objective of an appropriate international development strategy. The World Bank‟s

(1990) concerns on poverty stresses that a successful attack on poverty needs to be mounted

simultaneously on three fronts: economic growth that generates employment and incomes for the

poor; development of human resources of poor, which allows them to better exploit the

opportunities created by economic growth; and establishment of a social safety net among the

poor who are unable to benefit from growth and human development opportunities.

Most recently, the World Bank (2001) has come up with a new analytical framework to attack

poverty that is built on three pillars namely empowerment, security, and opportunities.

Empowerment is the process of enhancing the capacity of poor people to influence the state

institutions that affect their lives, by strengthening their participation in political processes and

local decision making. Security is the protection of the poor against adverse shocks, both via

better management of macroeconomic shocks as well as more comprehensive safety nets.

Opportunity is the process of increasing the access of the poor to physical and human capital and

increasing the rates of return of these assets.

22

In general poverty reduction policies could be grouped into three categories. Firstly, policies that

help and empower the poor to escape poverty on their own. These policies help to enhance

productivity assets that poor people own such as labour, farms, enterprises and credit facilitation.

They may also enable the poor to accumulate assets particularly their human capital as well as

improve the quality of such assets. Secondly, economic wide-policies which improve economic

growth and productivity such as macroeconomic policies, trade and sectoral policies that affects

overall economic growth and its impact on the poor. Thirdly, policies that seek to redistribute

income and wealth.

In this context, it seems that for any poor country, policies and strategies directed at promoting

economic growth is have a significant impact in raising the incomes of the poor people on a

sustained basis contributing to reduction of absolute poverty. In addition, the framework for

analysis developed by the Asian Development Bank shows that there are strong linkages

between economic growth, policies, institutions, and poverty reduction. These factors are related

to each other with poverty reduction as an outcome. Further, it has been observed that quality of

institutions affects economic growth and income distribution via policymaking structures and

regulatory frameworks. Figure 1.3 below illustrates how these factors are related to each other

with respect to poverty reduction.

2.2 The Conceptual Framework

2.2.1 Theories of Foreign Aid

The Concept of Foreign Aid

According to the dictionary of contemporary English (Longman), foreign aid is defined as

money or goods given to a poor country. This may be in the form of capital goods, food, military

hardware or technical assistance. The Development Assistance Committee defines foreign aid as

Official Development Assistance which involves transfer of resources from one country to

another on concessional terms. The transfer may be in the form of technical assistance, soft

loans, grants or food aid. The transfer of resources is classified as ODA if it is undertaken by

official agencies; it has the promotion of economic development and welfare as its main

23

objectives; and it has grant element of more than 25 percent of foreign aid and economic

performance model.

2.2.2 Saving Gap Model

Among these models is the famous model growth model. The model specifies that:

)1.......(..........................................................................................skg

Where: g is the proportional rate of growth of national income

S is the proportional of national income saved and invested

K is the incremental output-capital ratio.

The savings Gap model describes above assumes that any increase in foreign capital is devoted

entirely on to raising the rate of capital accumulation. In other words, foreign aid supplements

domestic savings rather than consumption. If a country receives foreign aid and expressed as a

fraction of its national income, then growth rate rises to:

)2...(........................................................................................................................)(1 kasg

Where: g1>g

If g* is a target rate of growth and k is assumed to be constant, one can deduce the rate of capital

accumulation© necessary to achieve the target as:

)3.(..................................................................................................................................k

gC

The difference between c and s indicates the savings gap or the amount of foreign aid necessary

to achieve the target. This can be defined as:

)4(..................................................................................................................................aSC

24

According to this model foreign aid has two effects: First it supplements domestic savings and

leads to higher rate of accumulation of capital, and second, it raises income per capita and hence

the proportional of income saved. Chenery (1990) argues that after a certain period of foreign aid

inflows, the rate of growth is become self sustaining.

2.2.3 Foreign Exchange Gap Model

Foreign Exchange Gap is the other propounded model. Some economists believe that the

difficulties experienced by LDCs arise not from their inability to save but from their inability to

acquire foreign exchange by exporting goods and services.

Accordingly, these economists view the role of foreign aid not as supplementing savings but

supplementing foreign exchange earnings. In this model the volume and value of exports(X) is

autonomous, while imports (M) are determined by the level of income(Y) and the propensity to

import (m). The import relationship can be expressed as:

............mYM …………………………………………………………………………………(5)

Given the desired level of growth of national income, the demand for foreign exchange to

finance imports may exceed the supply of foreign exchange obtained from export. If a foreign

exchange gap rises, which could reduce the rate of growth, foreign aid would be an important

agent to stimulate economic development. The absolute size of the gap would equal:

)6..(..............................................................................................................aY

XmXmY

The implication of models which stress the foreign exchange gap is that potential domestic

savings are being frustrated because some of the capital goods necessary to undertake a desired

level of investment are not produced domestically and cannot be obtained from abroad. If

additional foreign exchange were available the level of investment and the rate of growth would

increase.

Basically, these models are Keynesian in nature and rely on fixed technical relationship

(example, the incremental output-capital ratio) and the stable savings and imports propensities.

25

These models assume that, first, the rate of development is increase if the ratio of investment to

national income rises, and second, the investment ratio is rise if capital imports increase.

2.2.4 Foreign Aid in Tanzania

The current debate on aid flows to Tanzania has centered mainly on the specific projects and

individual donors with regard to effectiveness, intensity of aid, aid dependency, and the impact

of aid dependence on governance and institutions as well as the aid relationship. All of these

issues have been addressed by a number of studies such as Lancaster (1999), Ali, Malwanda and

Suleiman (1999) Bagachwa et.al. (1997), Helleiner (1999), Rugumamu (1997), World Bank

Report(1996). The studies concluded that those projects had high administrative cost. Further,

the projects were operating on the basis of tied aid and more uncoordinated among donors.

Furthermore, the existence and desire of the donor to see that resources did go to priority sectors

were identified by the donor rather than Tanzania government.

In a number of studies conducted such as Mbegani Fishery Development Centre, Bureau of

Statistics, the Veterinary Medicine Projects at the Sokoine University, Rugumamu, (1997) the

results show that aid supported project tended to be run and managed like private donor

companies. In the process, the recipient and beneficiary organizations were not only

marginalized but also increasingly showed little interest in what appeared to be foreign concerns.

Instead of promoting prudent resource management, donor agencies encouraged the recipient to

embark on costly and often low priority investments. Instead of strengthening weak and

ineffective institutions, donor agencies created parallel aid organization to manage their aid

projects. Instead of utilizing and developing the recipient‟s natural and human resources, donor

resorted to deploying foreign technical assistance

2.2.5 Empirical Evidence

Mwinyimvua (1988) examined the role of exports and foreign aid in enhancing the economic

growth of Tanzania for the period 1966-1985. A single equation model was specified using the

OLS technical of estimation. First, foreign aid was regressed against GDP growth rate. The result

indicated the coefficient of foreign aid to be positive and statistically significant at 1 percent

26

level. Second exports and foreign aid were regressed jointly against GDP growth rate, foreign aid

still showed a positive effect on growth rate.

Kwabena (1992) examined the relationship between aid and economic growth for Sub Saharan

Africa for the period 1968 to 1987. The study used a disaggregated cross-national time series aid

data and a least squares dummy variables model to investigate the effect of aid on economic

growth. The result showed the foreign aid has a small but positive and significant effect on

economic growth in Sub Saharan Africa. While the coefficient of loans was positive and

significant, the coefficient of grants was negative and statistically significant. This negative

coefficient was consistent with the findings of the critics of foreign aid who find a negative

relationship between foreign aid and economic growth. It is also consistent with Cashel-Cord and

Crag‟s (1990) argument that government may treat unconditional grants as pure resources

transfers. These result seem to be reasonable but the cross section data analysis does not fare

well in terms of drawing policy lessons for a specific country due to heterogeneity of sample

countries.

2.2.6 Current status on Partnership, Aid Coordination and Harmonization

The Government of Tanzania, its development partners and civil society have come a long way

in building successful partnerships and in improving aid management, donor/aid coordination

and harmonization. This was possible because, following the adoption of the Helleiner, (1999)

recommendations, both sides of the partnership played their role. The international community

accepted the need for harmonization and enhanced aid efficiency. For its part, the Government

adopted a clearly articulated development policy framework (including the Vision 2025, NPES

and the PRS), strengthened accountability, and improved financial management systems. Most

importantly, both sides agreed to work together in mutual trust and renewed their focus on the

common goal of poverty reduction.

Today, Tanzania is widely recognized as being at the forefront on issues of aid coordination,

harmonization and partnership. This has resulted in a store of knowledge of best practices that

can be shared with other countries and institutions. The TAS document articulates the national

development agenda and policy framework, as well as the best practices in development

27

cooperation and a framework for monitoring progress towards achieving best practices in

development partnership. While the TAS provides a broad outline of best practices for Tanzania

and her development partners in development cooperation, the TAS Action Plan, which was

developed in FY 2002/03, sets out the practical steps that the government and development

partners is follow in order to implement the TAS in the short and medium term.

The TAS Action Plan highlights four areas requiring urgent attention and representing the

greatest challenges in terms of reducing the burden of transaction costs and inefficiency, and

promoting harmonization over the three years of TAS' implementation. These are: first,

improving the predictability of external resources; second, increasing aid flows captured in the

government budget system; third, promoting government leadership of the policy process and

rationalizing processes; and fourth, improving national capacities in aid coordination and

external resource management.

2.2.7 Integrating Donor Funds into the Government Budget System

Improvements have been made to integrate donor funding into the government budget system.

This integration hinges on the on-going and significant reforms of the government's public

financial management system. They include: the Integrated Financial Management System

(IFMS), the Public Expenditure Review (PER), the Medium Term Expenditure Framework

(MTEF), the Public Finance Act 2001, the Procurement Act, 2001 and the Public Financial

Management Reform Programme (PFMRP). The Integrated Financial Management System

(IFMS), which has been adopted and implemented in all government ministries and agencies, has

strengthened the capacity of the government to record, monitor and control expenditures. It has

also allowed government to introduce standardized coding to facilitate monitoring and tracking

of expenditure through the budget system.

The consultative forums with development partners and other stakeholders, including the Public

Expenditure Review (PER), the Medium Term Expenditure Framework (MTEF) and the

Consultative Group Meeting, have been very successful in establishing an open dialogue on

budgetary issues, giving comfort to all partners and stakeholders. This in turn has led to greater

transparency and trust in the government financial management system. The Secretariat, which

28

was previously housed by the World Bank, has now been shifted to the Ministry of Finance,

thereby enhancing local ownership.

In addition, the ongoing implementation of the Public Financial Management Reform

Programme (PFMRP), together with the Public Finance Act and Public Procurement Act of

2001, has enhanced confidence in the government's financial management capacity and control

processes.

All these undertakings have resulted in increased donor trust in the government. This has

encouraged them to provide direct support to the government budget, through the PRBS and

PRSC facilities and to support sector-wide basket approaches in the Education and Health

Sectors, as well as joint funding of the Poverty Monitoring System, the Legal Sector Reform

Programme, and Local Government Reform Programme. While budget support and basket funds

are already integrated within the Government's exchequer system, the greatest challenge remains

in capturing resources that flow directly to projects being implemented by sector ministries and

local government.

2.2.8 Foreign Aid in the Long Run

According to Waweru (1995) aid is given with the hope and expectation that in the long run it is

enable recipient counties to build up their productive capacity so that they can finance their

investment and import requirement through normal commercial channels.

In this respect, it can be argued that in the long run aid help to promote self-reliance. This issue

can be illustrated by looking at experiences of two countries. South Korea received large amount

of aid in the 1950s, which then declined sharply. Overtime, its economy has grown rapidly and

its domestic savings rose from 6.9 percent of GDP in 1953-5 to 18.7 percent in 1974-76. Its

external trade deficit remained roughly constant, at a round 9 percent of GDP, while aid‟s share

in financing fell from 80 percent to 17 percent. South Korea still requires foreign capital, but

obtains it through private market (Waweru, 1995). India has also done well in terms of

promoting self-reliance through receipt of aid. Indians net inflow of foreign aid peaked during

the early 1960s. Gross domestic savings rose from around 13 per cent of GDP in early 1960s to

around 22 per cent in the late 1970s. The net inflow of saving from abroad declined from

29

between 2.5 and 3.0 per cent of GDP to less than 1 per cent. Therefore, despite the direct and

indirect costs associated with aid, its contribution in the long run is very vital (Waweru, op.cit).

2.2.9 Sustainability

There are two aspects of sustainability that are important to consider in light of the increasing use

of foreign aid. The first is economic growth since it is recognized that growth is a sine qua non

for poverty reduction (URT, 2000). The second, which depends to some extent on progress on

the first, is the tax effort. It is clear that Tanzania‟s economic performance in recent years has

been impressive, particularly relative to most of sub-Saharan Africa. In the last five years,

growth has averaged more than five percent, and in 2002, it registered 6.2 percent in real terms.

Inflation has also remained low.

The PAF contains a number of actions that seek to ensure the maintenance of macro-economic

stability, and the government‟s progress in these areas was deemed to be satisfactory following

the November 2003 PRSC annual review (Helleiner, 1999).

The main concern about Tanzania‟s growth performance is that it has not resulted in much

poverty reduction. Growth has been strongest in the capital city, where poverty is least prevalent,

and those sectors that have limited employment-generating effects, such as mining and tourism.

But it has not touched rural areas and the agriculture sector, from which a large majority of

Tanzanians derive their livelihoods, to the same extent (URT 2001). Ensuring that the benefits of

growth reach more Tanzanians require that certain structural barriers to private sector

development be addressed (Griffins et al, 1996).

Although the Europe Aid and ODI (2003) analytical framework posits than an improved

investment climate is be an intermediate outcome of greater use of foreign aid, experience

suggests this is unlikely (Lancaster, 1999). The reason is that donors involved in a general

budget support arrangement are usually primarily concerned with tracking the use of public

resources and for obvious reasons. However, an unintentional consequence can be that issues

that should be addressed in the policy dialogue surrounding the provision of general budget

support, but are only indirectly related to the use of public resources, are given lower priority.

While several donors believe this is the case in Tanzania, the PAF includes numerous measures

30

that are intended to improve the enabling environment for business, suggesting that private sector

development is a key topic in the policy dialogue.

A second aspect of sustainability is the ability to finance public expenditure from locally

generated revenue rather than through large infusions of external assistance. Tanzania is very

much dependent on foreign aid. External assistance accounted for 5.9 percent of GDP in FY02

and was projected to reach 7.9 percent of GDP in FY03 (Maxwell, 1996). In FY03, aid

accounted for 45 percent of the Government‟s total budget 87 percent of the development budget

and 24 percent of the recurrent budget (Motoki, 2002). At the same time, Tanzania‟s tax effort,

measured by revenue as a share of GDP, is one of the lowest in sub-Saharan Africa (Mushi,

1980).

Despite meeting IMF revenue targets in recent years, tax revenue only stands at approximately

12 percent of GDP (Mutahaba, 1989). Consistent with the arguments of Sadawa (1996) and

Lancaster (1999), several donors in Tanzania argue that the high levels of aid are dampening the

incentives for the Government to further develop its own revenue sources. Tax policy touches on

a number of complicated issues, and, as Bagachwa et al (1997) note, focusing too heavily on

raising the revenue-to-GDP ratio can have corrosive consequences on state-society relations

without attacking the main reasons for poor tax compliance poor quality of services, corruption,

mismanagement, and waste in the case of Tanzania (Helleiner, 1999). It is also not obvious what

the appropriate balance is between generating revenue and providing strong incentives for

private investment. In the context of a growing economy, a constant revenue-to-GDP ratio can

still finance increasingly ambitious targets for service delivery.

Nevertheless, the PAF includes a few rather sensible actions related to broadening the tax base

and simplifying the tax system. These focus on limiting tax exemptions, eliminating a number of

“nuisance taxes” at the local level, and harmonizing the local tax system with the national

system.

2.2.10 Capacity Building for Aid Coordination and External Resource Management

The TAS and the multiplicity of reforms that have been launched since the mid 1990s, all place

government firmly in the lead of the development programme. It is widely accepted that

31

government leadership and ownership is one of the key factors that is determine the success of

these reform programmes. In the past, donor support to capacity building tended to focus on

strengthening capacity in relation to the requirements of specific projects or particular donor

systems, rather than general on capacity building to support the system. This, coupled with the

fact that government did not articulate an overall vision of capacity building, has led to a

somewhat weak capacity for aid coordination and resource management.

In order to improve performance and strengthen the voice of Tanzanians in managing external

resources, capacity is needed within the civil service and at all levels of government as well as

within civil society to act as a monitor on government performance on external resources across

a whole spectrum of activities, including financial management, project management, and

negotiation skills.

Now the focus of both government and the development partners is on building capacity in

sector ministries, in particular, the Policy and Planning Departments. These departments are

supposed to play a leadership role in coordinating all processes and in promoting the effective

ownership of budgeting processes, such as the PER/MTEF, as well as in aid coordination and

resource management of their ministries.

2.2.11 National Development Policy Framework

During the late 1990s, the Government of Tanzania, in consultation with other stakeholders,

formulated the National Vision 2025, which provides the overall development framework. It sets

out the national objectives for social and economic development and the vision of attaining a

middle-income society by 2025.

The long-term poverty reduction targets are articulated in the National Poverty Eradication

Strategy (NPES). In the short and medium term, the Poverty Reduction Strategy Paper (PRSP)

provides strategies for poverty reduction in those areas that are identified as priorities, as well as

indicating financing needs and monitoring mechanisms.

The framework for strengthening aid/donor coordination, harmonization of processes,

partnership, national ownership of the development process and managing the external resources

32

for development is provided in the Tanzania Assistance Strategy (TAS), launched in June 2002.

The aims encapsulated in the TAS are also a reflection of the international consensus that has

emerged since the early 1990s on aid management.

It is now widely agreed that, in order to improve the effectiveness of aid in support of poverty

reduction goals, there is an urgent need to improve aid coordination, promote harmonization of

systems and strengthen government ownership of the development processes. Recently, the High

Level Forum on Harmonization (2003), the OECD DAC Task Force on Donor Practices (2003)

and the New Partnership for Africa's Development (NEPAD), have all outlined the practical

steps needed to bring about substantial improvements in aid/donor coordination and

harmonization. The TAS is Tanzania's guide to ensuring that these objectives are achieved on the

ground and transformed into real benefits for people living in poverty, in terms of increased aid

effectiveness.

The TAS and the multiplicity of reforms that have been launched since the mid 1990s, all place

government firmly in the lead of the development programme. It is widely accepted that

government leadership and ownership is one of the key factors that is determine the success of

these reform programmes.

In the past, donor support to capacity building tended to focus on strengthening capacity in

relation to the requirements of specific projects or particular donor systems, rather than general

on capacity building to support the system. This, coupled with the fact that government did not

articulate an overall vision of capacity building, has led to a somewhat weak capacity for aid

coordination and resource management.

In order to improve performance and strengthen the voice of Tanzanians in managing external

resources, capacity is needed within the civil service and at all levels of government as well as

within civil society to act as a monitor on government performance on external resources across

a whole spectrum of activities, including financial management, project management, and

negotiation skills. Now the focus of both government and the development partners is on

building capacity in sector ministries, in particular, the Policy and Planning Departments. These

departments are supposed to play a leadership role in coordinating all processes and in promoting

33

the effective ownership of budgeting processes, such as the PER/MTEF, as well as in aid

coordination and resource management of their ministries.

2.2.12 Sources and Recipients of Aid

Most of the government in developed country give their aid both directly-bilateral aid-and

directly via multilateral and other channels. One of the main channels of multilateral aid is the

International Development Association (IDA), the World Banks soft loan window. IDA funds

are contributed by donor government in triennial replenishment; its loans are highly confessional

and go mostly to low-income countries.

The other main multilateral channel is the regional banks and the UN agencies such as UNDP,

FAO, WHO and regional banks such as the Africa, Asian and Inter- America Development

Banks. Finally there is the EU‟s aid program and its main instrument, is the European

Development Fund (EDP).

Recipients of aid include low-income and middle-income countries. In Africa, and Sub-Saharan

Africa in particular, nearly all aid goes to low-income. Most of the aid for middle-income

countries goes to Israel, Jordan and Syria. Egypt, which is low-income in the OECD‟s tables but

lower middle in the World Bank‟s tables, is the main recipient in North Africa. Aid to America

mainly goes to Central American and the Caribbean countries. American countries that receive

aid include Cyprus, Malta and Turkey. The main recipient of aid in Europe is Turkey which is an

Upper Middle Income Country.

2.2.13 Institutional Set-up for Promoting Donor/Aid Coordination and Harmonization

In order to guide the government and development partners in moving forward on improving aid

coordination and harmonization, and in implementing the TAS, a TAS/Harmonization

Implementation Group, under the chair of the Ministry of Finance, has been established with

joint membership of the government and the local Development Assistance Committee (DAC).

The role of the group is to advise and oversee the implementation of TAS and harmonization

initiatives. In addition, a TAS Technical Secretariat, consisting of Government and DAC

representatives, has been established to support the work of the TAS/Harmonization

34

Implementation Group by providing technical inputs. The secretariat is stationed at the Ministry

of Finance.

Consensus has been reached between the government and development partners to

institutionalize the process of independent monitoring of the development partnership in

Tanzania. The IMG undertakes a medium term assessment of progress made towards the goals of

the development partnership as jointly adopted by both the government and development

partners, and as set out in the TAS. The group is involved in setting targets and recommending

solutions to overcome any difficulties in attaining these targets. The first IMG report was

submitted at the CG meeting held in December 2002. The report provided some important

suggestions for improving aid coordination and harmonization.

2.2.14 Constraints, Challenges and the Way Forward

There are institutional constraints, with the donors' institutional set-up not being supportive. In

most cases, decisions have to come from head offices rather than local offices. Commitment is

required, both by the local DAC and by development partners' head offices, to make practical

improvements in this area. The government's capacity to manage the various processes,

implement the TAS and harmonization initiatives is also constrained. Although capacity building

is being addressed across a wide range of programmes, including the Public Sector Reform

Programme and the PFRMP, efforts are needed to develop a comprehensive capacity building

Programme.

Parallel systems and structures for implementing development projects and programmes are a

major challenge both to the government and the development partners. Development assistance

is badly needed in Tanzania to tackle the greatest enemy, namely, poverty. However, for this

assistance to be effective, and in order for the government to be held accountable for these funds,

they should be delivered in a manner that supports national public financial management systems

and structures. While it looks easier to integrate new development projects and programmes

within the government systems and structures, the real challenge is to integrate those projects

and programmes currently operating parallel to the government systems and structures.

35

As recognized by the OECD Task Force on Donor Practices and the Declaration on

Harmonization, made by development partners at the February 2003 High Level Forum on

Harmonization, development partners should provide opportunities to rationalize the various

processes, systems and structures. Some joint initiatives have started to take place, such as the

joint portfolio review of the UN System and World Bank held in May 2003. In the medium term,

efforts should be made to consolidate donor interventions within a common Country Assistance

Strategy with a single cycle of reviews. Such a strategy would indicate comparative advantages

between donors in sector work and modality.

Table 1.3 and Figure 1 and 2 summarizes the conceptualized framework whereby Development

Partners contributing to GBS, Major clusters of poverty reduction outcomes, and External

Resources Projections Data were use to review the literature review in order to achieve study

objectives.

Basic Assumptions

FDI and economic growth relationship is homogeneous;

The technological change is the only possible source of per capital output growth in the long

run;

Productive efficiency which defines property rights and enforceable contracts and also

institutions that place limits on the president and other political leaders are immensely crucial

to spearhead and sustain economic growth and development.

GBS directly flow in the budget frame through budgetary cash flow; and

There is a strong relationship between the three clusters of MKUKUTA; and indeed between

productive and service sectors

General budget support (GBS) has been an increasingly important mode of development

assistance, receiving growing attention from bilateral donors and international financial

institutions in the context of a partnership-based approach to aid. General budget support is a

coordinated and harmonised way of aid financing, which is provided to Tanzania by 14

Development Partners to directly support the implementation of the NSGRP through the

Government‟s budget. These 14 Development Partners are 11 bilateral and 3 multilateral donors.

Their share of total amount of GBS flowing into the budget is made up in the following way in

financial year 2006/07 as seen in Table 1 below.

36

This form of aid promises benefits for both donors and recipient countries: increased scope for

scaling up development assistance, reducing transaction costs, strengthening country ownership,

and achieving greater development effectiveness than traditional modes of aid delivery. Yet the

concept of budget support itself is still emerging and subject to different interpretations, and

skeptical observers question its impact and fiduciary soundness and the incentives it provides.

According to GBS Annual Review 2006; General budget support makes up 16% of the

Government of Tanzania‟s budget in financial year 2006/07 and it is the preferred aid modality

for the following reasons:

i. The funds go straight into the national budget and the GoT decides how to spend

the money, thereby increasing national ownership of development issues.

ii. GBS strengthens the parliamentary role for decision-making and shifts

government accountability from donors to citizens.

iii. It makes aid contributions more predictable and so makes it easier for the GoT to

implement its poverty reduction programme.

iv. GBS saves time and is eventually save money as there is one, rather than many,

process for reviews, assessment and dialogue with Development Partners.

National Strategy for Growth and Reduction of Poverty (NSGRP) is the country‟s strategy to

reduce poverty and boost economic growth over the next years. NSGRP was launched in 2005

and is a second national organizing framework for putting the focus on poverty reduction high on

the country‟s development agenda. The NSGRP is informed by the aspiration of Tanzania‟s

Development Vision (Vision 2025) for quality education and international competitiveness. It is

committed to the Millennium Development Goals (MDGs), as internationally agreed targets for

reducing poverty, hunger, diseases, illiteracy, environmental degradation and discrimination

against women by 2015. It strives to widen the space for country ownership and effective

participation of civil society, private sector development and fruitful local and external

partnerships in development and commitment to regional and other international initiatives for

social and economic development.

The NSGRP builds on the Poverty Reduction Strategy Paper (PRS(P)) (2000/01-02/03), the PRS

Review, the Medium Term Plan for Growth and Poverty Reduction and the Tanzania Mini-Tiger

37

Plan 2020 (TMTP2020) that emphasize the growth momentum to fast-track the targets of Vision

2025. The NSGRP is expected to last 5 years, i.e. form 2005/06 to 2009/10. The end point of the

strategy coincides with the targets of the National Poverty Eradication Strategy (NPES-2010); it

is two thirds of the way towards the MDGs (2015) and 15 years towards the targets of Vision

2025. The longer-term perspective (5 years) is considered to be a better time frame than that of

three years. It allows for a more sustained effort of resource mobilisation, implementation and

evaluation of poverty.

Analyses of poverty profile strongly support the views from the consultation about the factors

that precipitate poverty in Tanzania. Poverty has many dimensions, often caused and reinforced

by underlying unequal distribution of resources, incomes and opportunities. The Strategy

identifies three major clusters of poverty reduction outcomes: (i) growth and reduction of income

poverty; (ii) improvement of quality of life and social wellbeing and (iii) good governance

(Figure 2)

One of the major conditions for poverty reduction is high economic growth. In general, growth

depends on the quantity and the quality of inputs including land and natural resources, capital,

labour and technology. Quality of inputs implies embodied knowledge, which is a basis for

innovation, technological development, increases in productivity and ultimately,

competitiveness.

There is a strong relationship between the three clusters; and indeed between productive and

service sectors. Growth leads to higher incomes, thus reducing income poverty, assuming

equitable distribution. Higher incomes enable households to improve human capabilities through

better education, health, nutrition, and shelter, i.e. social well being. Human capability is, in turn,

one of the critical sources of long-term growth. Also, growth enables the government to collect

more revenue for provision of public services such as health, education, administration and

infrastructure.

Governance, on the other hand, provides conditions within which growth, well-being and

poverty reduction take place. A social-political environment is required that ensures equal access

38

to productive resources, social services and human rights. Therefore, equity applies to all the

three major clusters.

According to Graham Teskey, Head of Africa Division, DFID; General budget support does not

simply involve a transfer of funds, however. This point is often misunderstood. In reality, GBS

consist of three core components. These are : ( Based on GBS Evaluation Study Common

Definitions) a) Dispersal of funds b) Policy dialogue and c) Technical assistance and capacity

building activities primarily in the area of public expenditure management and public financial

management.

2.2.15 Key Characteristics of Budget Support

The OECD definition outlined in recent DAC guidelines defines budget support “as a method of

financing a partner country‟s budget through a transfer of resources from an external financing

agency to the partner government‟s national treasury. The funds thus transferred are managed in

accordance with the recipient‟s budgetary procedures” (OECD-DAC 2005a).

According to TAS Implementation Report FY 2002/03- 2004/05 Budget Support is an aid

delivery modality that provides financial assistance to the overall national budget (Government

Consolidated Fund). It is allocated by the Government according to its legal and budgetary

process and hence subjected to the same degree of contestability as domestic resources.

General Budget Support Annual Review 2006 document, says; General Budget Support is an aid

financing modality which provides financial assistance to the overall national budget; provides

resources to support the financing of Tanzania‟s national poverty reduction strategy as set out in

the MKUKUTA/ NSGRP. The funds are provided to the GoT to spend for the implementation of

MKUKUTA, using its own financial management and accountability systems.

The definitions of Direct Budget Support (DBS), of General Budget Support (GBS) and of

Sector Budget Support (SBS) are presented in Table 2 below

Therefore the Key characteristics of Budget Support are;

i. Channelling of donor funds to a partner country using its own allocation, procurement,

and accounting systems;

ii. Support for recipient country‟s own development programs, typically focusing on

growth, poverty reduction, fiscal adjustment, and the strengthening of institutions,

particularly the budgetary processes;

39

iii. Policy content, performance assessment, and an accountability framework that focus on

policy measures benchmarks related to overall budget and policy priorities, set out in the

country‟s own poverty reduction strategy and medium-term expenditure framework;

iv. Provision of donor funds at regular intervals, ideally in alignment with the country‟s

annual budget cycle; and

v. Agreements on general budget support priorities and expenditures, so that in principle

there is no need to earmark funds for specific items.

Budget support is provided in foreign currency, which is deposited with the central bank to be

converted into local currency and credited to the central government account at the central bank.

2.2.16 Expectations from the Budget Support

Underlying the shift to increased budget support is the hope that this mode of financing is make

aid more effective by:

i. Strengthening country ownership and ensuring the sustainability of reforms.

(Stefan and Zoran, World Bank 2001) indicated that sustainable reform requires deep and

broad country ownership, because successful policy implementation, of NSGRP for

instance, ultimately depends on strong political commitment. In countries where such

commitment does not exist, budget support could not effectively support a program of

policy actions and reforms. Compared to other aid modalities, budget support creates a

framework more conducive to strengthening country ownership, for a number of reasons:

Integration of external assistance into national budget; Better management of public

expenditures, as a centrepiece of budget support programs and by providing more

discipline in the budget process.

ii. Reducing transaction costs for the government by avoiding parallel project and reporting

arrangements.

The evidence to date suggests that there is still a long way to go to fully reap the promise

of reduced transaction costs through budget support arrangements in the Strategic Plan

with Africa (SPA) review (SPA 2005) point to insufficient progress in harmonization and

alignment across the board as a determining factor. Similar scepticism has been

expressed by Killick (2004), who suggests that the rhetoric on lower transaction costs is

40

not sufficiently evidence based. Lawson and others (2005) find that in Tanzania the lack

of evidence of reduction in transaction costs arises substantially from the fact that budget

support arrangements have been additional to continuing large numbers of donor projects

in public sector and the parallel rise in the importance of common-basket funding.

iii. Increasing the predictability of funding. Achieving greater clarity and predictability of

funding presents significantly challenges to both Development Partners and the

Government of Tanzania. For donors, this effort usually requires: (a) announcing multi-

annual commitments in advance; (b) disbursing funds as early as possible in the partner

country‟s budget process and fiscal year; (c) better donor coordination and exchange of

information about the likely timing and conditions of disbursements; and (d) an attempt

to minimize in-year suspension of committed funds to avoid disrupting development

expenditures. As a result of these measures, evidence suggests that in recent years, budget

support to Tanzania has become more predictable and less variable than project aid.

(World Bank Report on Tanzania Public Expenditure Review, 2003).

iv. Addressing cross-cutting government-wide policy, expenditure, and institutional

priorities that cannot be tackled with stand-alone and sector projects.

v. Promoting government accountability, both internal (to parliament and taxpayers) and

external (to donors).

vi. Improving the efficiency and transparency of budget spending, reducing the

fragmentation of public expenditure management, and integrating recurrent and capital

expenditures.

vii. Buttressing the recipient country‟s own budget process and public financial management;

and

viii. Encouraging a greater orientation to medium-term results by focusing on national

development objectives rather than on donor-driven priorities, operational issues, or

activities with limited scope and effect.

2.2.17 The Rationale for General Budget Support

According to (Joint Assistance Strategy for Tanzania, 2006), GBS has been associated with

greater ownership, harmonisation, alignment, managing for results, and mutual and domestic

41

accountability. Specifically, GBS has demonstrated the following advantages over other

instruments:

i. It is consistent with the Government legal framework:

The Constitution of the United Republic of Tanzania, Chapter 7, Article 135 and 136 on

the control of the legislature on public finances, which state that all revenues/finances

derived from various sources for the use of the Government shall be deposited in the

Consolidated Fund and be appropriated by the Parliament.

ii. It increases the proportion of external resources subjected to the national budget process,

thereby increasing national ownership of the development process. This allows for a

more equitable distribution of development funds within and across MDAs, Regions and

LGAs, as all funding allocations are planned in a single process-the national budget.

iii. It enhances domestic accountability as it places the Government more fully within the

scrutiny of the Parliament and civil society; more decisions are taken within the

framework of a transparent budgetary process.

iv. It is shifting Government accountability from DPs to citizens through the Parliament and

thus strengthens the Parliamentary role for decision-making.

v. It contributes to transaction cost reduction, DP harmonisation and the alignment process

through adopting common PAF and holding joint dialogue.

vi. It strengthens national public financial management and accountability system by

providing funds directly to the budget to be utilized through Government‟s own systems

and by using national accounting and audit procedures and systems.

vii. It increases the predictability of external resource availability and disbursements by

basing funding decisions on outcomes of a joint review of performance based on a

commonly agreed Performance Assessment Framework.

2.2.18 Foreign Aid in Tanzania

According to the Congress of the United States (1997) a common means of defining and

measuring foreign aid is official development assistance, which is used by the Development

Assistance Committee of the Organization for Economic Cooperation and Development

(OECD). Official development assistance consists of grants or loans that one government or

multilateral organizations gives to a developing country to promote economic development and

42

welfare. That assistance must be granted on concessional terms, which in the case of a loan

means that at least 25 percent of it must be in the form of a grant. Development assistance also

include technical cooperation, such as teaching farmers new techniques or providing advice on

making economic reforms; they exclude military assistance, political development programs,

export credits, and debt relief for military loans.

The current debate on aid flows to Tanzania has centered mainly on the specific projects and

individual donors with regard to effectiveness, intensity of aid, aid dependency, and the impact

of aid dependence on governance and institutions as well as the aid relationship. All of these

issues have been addressed by a number of studies such as Lancaster (1999), Ali, Malwanda and

Suleiman (1999) Bagachwa et. Al (1997), Helleiner (1999), Rugumamu (1997), World Bank

Report (1996). The studies concluded that those projects had high administrative cost. Further,

the projects were operating on the basis of tied aid and more uncoordinated among donors.

Furthermore, the donor rather than Tanzania government identified the existence and desire of

the donor to see that resources did go to priority sectors.

In a number of studies conducted such as Mbegani Fishery Development Centre, Bureau of

Statistics, the Veterinary Medicine Projects at the Sokoine University, Rugumamu (1997) the

results shows that aid supported project tended to be run and managed like private donor

companies. In the process, the recipient and beneficiary organizations were not only

marginalized but also increasingly showed little interest in what appeared to be foreign concerns.

Instead of promoting prudent resource management, donor agencies encouraged the recipient to

embark on costly and often low priority investments. Instead of strengthening weak and

ineffective institutions, donor agencies created parallel aid organization to manage their aid

projects. Instead of utilizing and developing the recipient‟s natural and human resources, donor

resorted to deploying foreign technical assistance.

However, general budget support, particularly when provided by bilateral donors, may be more

prone to unpredictability than other aid instruments because it is easier to hold up disbursements

in the face of changing political circumstances. An explicit goal of the Partnership Framework

then is to improve the predictability of donor flows to the Government. To do so, PRBS/PRSC

donors have endeavored to, first, sanction the Government for poor performance in the current

43

fiscal year with a reduction in budget support in the subsequent fiscal year and, second, disburse

budget support as early as possible in Tanzania‟s fiscal year. Though, while there have been a

few minor incidents that threatened to hold up disbursements of general budget support by

individual donors; For example, the UK withheld £10 million from its FY02 disbursement when

it was disclosed that the Government intended to purchase a $40 million air traffic control

system designed for military use; the arrangement has not yet been tested by a major event that

might cause a majority of donors to withhold general budget support.

2.2.19 Capacity Building

This is one of the advantages of budget support over other aid modalities, is that, it more

effectively draws on governments‟ existing budgeting and planning capacities and can have the

effect of strengthening those capacities as a result of learning-by-doing effects. But in Tanzania

it is widely recognized that most actors i.e. the Parliament, NGOs, the private sector, research

organizations, the media, etc. suffer from serious capacity constraints.

As has been argued, the effectiveness of service delivery is depend to a great extent on these

actors being able to play their appropriate roles in holding the Government accountable,

disseminating accurate information to citizens, engaging in informed policy debate, and

contributing to a growing economy that helps deliver sustainable benefits to Tanzanians. General

budget support offers little assistance to these entities for strengthening their capacities. In

addition, it is likely that there are limits to the capacity building effects of general budget support

within the Government. For example, general budget support requires that line ministries

develop greater technical capacity to more effectively make their cases to the Ministry of

Finance for budget allocations since they lose access to extra-budgetary finance. Technical

assistance can help in this regard. Even when it comes to improving public expenditure

management-perhaps the most automatic benefit arising from providing assistance as general

budget support i.e technical assistance is often needed. The point is not that general budget

support is an inappropriate instrument for aid delivery, but rather that it requires various forms of

complementary investments to deliver the kinds of benefits to which it aspire

44

CHAPTER 3

RESEARCH METHODOLOGY AND WORKING DATA

It is pertinent at this juncture to describe how the study is designed and how it is conducted by

covering the research design, area of the study, sampling procedures, population and sample size,

validity and reliability of data, data collection techniques, data analysis plan and scope of the

study.

3.1 Research Methodology

3.1.1 Research Design

A case study design is hereby adopted; essentially this is an analytic research study because it

describes the state of affairs, as it exists at present. It also allows an in depth investigation of

issues as well as making use of available information which is analysed to make critical

evaluation. The case study design is easier to describe, analyse and discuss data originating from

the Ministry of Finance. The study is quantitative approach, to be supplemented by the

qualitative approach.

3.1.2 Reasons of choosing a Case Study design

The case study design is used due to the following reasons:

a) Study was conducted at a single unit that is the Ministry of Finance (MoF).

b) It is possible to use its findings to other units or organizations.

c) The accessibility to the area of study and relevant information could be possible.

d) The study focuses on contemporary events and does not need control over behavior events.

e) The time factor is be limited and the report must be prepared within the period of four

months.

f) It is be a complete study on itself in a sense that the research topic is be studied and

observed in detail.

g) It is enable the researcher to get fair answers of the research questions, which stress on a

particular aspect of the selected topic i.e. the effectiveness of foreign aid in budget support.

45

The advantages of the selected design are to gain an insight into a situation and make a

conclusion and recommendation from which are going to be less tentative.

3.1.3 Area of study

The study is conducted at the Ministry of Finance, Dar es Salaam. The MOF was deliberately

chosen because it is where all the procedures and systems for managing aid are housed.

Moreover, all-important documents related to the study were easily traceable in the ministry.

Key people were directly be involved with the management of external aid as well as general

budget support processes are at the MOF.

3.1.4 Population

The sample population for the study is Ministry of Finance officials and Development Partners

directly involved in the day-to-day operations of procedures and systems for managing aid.

3.1.5 Working Data

There are two types of data collected in this study; (i) Primary data have been collected through

questionnaires and interviews. Questionnaire and interview was conducted to a sample of 40 (30

MOF and 10 DPs) officials working in the foreign aid area in the Ministry of Finance and

Development Partner organization using a combination of both purposive and random sampling

procedures. About 26 officials from the MOF, External Finance Department and 4 from the

Accountant General department is be contacted for in the study. Ten Development Partners

specifically working closely with the MOF on the general budget support is be contacted and

included in the study. Some of them are The World Bank, African Development Bank,

Norwegian Embassy, Royal Danish Embassy, the UK and the European Commission.

Secondary data have been collected from Ministry of Finance through published budget reports

and other relevant related reports.

3.1.6 Methods of Data Collection

The methods of data collection that have been employed include:

46

Observation of day-to-day operational activities of the organization, which I was able to

familiarize.

Sample of various individuals who have direct concern to the units, which was interviewed.

The gathered information was compared with actual situation, delegation was made and

finally conclusion was drawn.

Other method was documentary sources. The work was planned such as that; various General

Budget Support (GBS) documents were reviewed for the purpose of understanding the topic

more thoroughly.

3.1.7 Participatory Observation

The researcher had physically be participating day-to-day activities in the organization. The

researcher was involved in the execution of the activities hence it was able to collect relevant

data.

3.1.8 In-depth interviews

To capture information from a selected group in the Ministry an in-depth interview has been

conducted.

3.1.9 Questionnaires

In order to reveal the real situation, a Questionnaire Survey was performed. Questionnaire was

supplied and Royal Danish Embassy, the UK and European Commission were interviewed

informally or formally, out of 30 questionnaires have been distributed at the MOF. Data have

been processed and evaluated with computer software with application of Microsoft Excel as the

case may be Minitab Session Windows as mathematical statistical

3.1.10 Review of Documents

Secondary data was obtained through review of various documents, journals, books and reports

related to the topic. These provided useful information to supplement and clarify data collected

from other primary sources. Furthermore, they enabled the researcher to check consistency and

accuracy of the data that was collected. It is often suggested that using more than one data

47

collection instrument permits the researcher to combine strengths and rectifies some deficiencies

in using only one source of data

3.1.11 Data Processing and Analysis

In this study qualitative and quantitative analysis techniques were used. The information

gathered through interviews and observation have been coded and tallied manually with the

assistance of a calculator. Furthermore data gathered through open-ended questions were

analyzed. Also data obtained from documentary sources that the researcher deemed relevant to

the study is be used to substantiate the findings.

3.1.12 Theoretical Model

This study adopts a production function framework to examine the relationship between foreign

aid and economic growth in Tanzania over the period 1990-2006.

The investigations employ a modified model used by Kwabena (1992). The model assumed that

the growth rate of GDP is a function of investment, foreign aid, exports and the private capital

inflows or additional external resources provided outside the official channel. These are policy

variables that the decision maker can manipulate to speed up economic growth. The model is

stated as:

)7........(..............................................................................................................,,, NCIXKAg

Equation 7 can be specified in linear form as:

)8.....(............................................................543210 UNCIDUXKAg

Where: g = GDP growth rate

A = Foreign aid

X = Exports

K = Investments

NCI = Private capital inflows (net)

DU = Dummy variable for occurrences of unfavorable weather

U = Stochastic error term

1 = coefficients to be estimated

48

The expected sign of coefficients are as follows;

)9..(..........................................................................................05,0302,01,0

Export of goods and services provide a country with foreign currency to import machines,

consumer goods and raw materials needed for production (Mwinyinvua, 1988). Export sector has

appositive externality effect on other sectors of the economy as it avails foreign exchange to

other sectors and enlarges the market beyond the national boundaries.

Investment or capital formation is a crucial component of economic growth of any country. If the

economy is operating on its production frontier and the capital output ratio remains constant,

investment should increase output and hence growth of GDP.

Foreign resources for investment received through other unofficial channels have impact on

economic growth in Tanzania. It enters the growth equation with positive coefficient.

Weather plays an important role to the economic growth of developing countries, whose

economies depend on Agriculture.

Tanzania is highly dependent on imported machines and raw materials for production of goods

and services and yet with low and unstable foreign exchange earnings. Therefore, any additional

foreign currency obtained through foreign aid could increase GDP growth.

Empirically, Kwabena, (1992) finds that foreign aid, investments, exports and private capital

inflows are positively related to GDP growth. The coefficient Weather is negatively related to

GDP growth.

3.1.13 Conceptual Framework

For the purpose of this study each component of foreign aid were considered since different

components of foreign aid have different impact on economic GDP growth since 1990-2006.

The conceptual model for this study takes the following form:

)10(............................................................543210 wEILGY

Y = economic growth i.e. % of GDP growth

49

β0 = Intercept

G = Grants

L = Loans

I = Investment proxed by private sector capital formation

E = Exports

W = Weather a dummy variable

µ = Stochastic error term

βi = coefficients to be estimated.

3.1.14 Variables and Measurements (Definition of Variables)

As indicated above, the variables for this study are: economic growth, Grants, Loans,

Investments proxed by private sector capital formation, Exports and Weather. These variables is

be measured in Tanzania shillings except weather which is equal to a unity (1) for years in which

there was favourable weather and zero (0) for years in which there was unfavourable weather

and economic growth which is be measured by growth rate (Economic survey, 2006).

50

CHAPTER 4

EMPIRICAL RESULTS

4.1 Results of the Regression Analysis

Interpretation

R-square=0.894; this coefficient of multiple determination indicates that 89.4 percent of

variance in economic growth has been accounted for by the combined predictors. This shows

that the predictors are good in explaining the variation in the dependent variable or they are good

predictors of the dependent variable.

Interpretation

On the basis of the hypothesis mentioned here under,

0H : The predictors jointly do not contribute or account for any variability in the dependent

variable.

aH : The predictors; jointly contribute or account for the variability in the dependent variable.

From the table above, the F-ratio is 18.58. This value is compared with the value of F from the

table at 5% level of significance which is 3.2. Since the value of F- calculated (18.58) is greater

than the F-tabulated (3.2); we reject the null hypothesis and conclude that, the predictors jointly

account for the variability of the dependent variable. Further the overall performance of the

model is statistically significant. The last column of the table shows that the probability of

committing type two error of rejecting true null hypothesis is Zero.

Model Summary

.946 a .894 .846 .74338 Model 1

R R Square Adjusted R Square

Std. Error of the Estimate

Predictors: (Constant), Weather, Private investment, Loans, Grants, Exports

a.

ANOVA b

51.352 5 10.270 18.585 .000 a

6.079 11 .553

57.431 16

Regression

Residual

Total

Model 1

Sum of Squares df Mean Square F Sig.

Predictors: (Constant), Weather, Private investment, Loans, Grants, Exports a.

Dependent Variable: GDP growth rate b.

51

Coefficientsa

1.232 .479 2.572 .026

4.696E-07 .000 .089 .155 .880

-5.32E-06 .000 -.533 -1.616 .134

5.508E-07 .000 .199 .339 .741

3.262E-06 .000 1.087 1.385 .193

1.764 .405 .479 4.354 .001

(Constant)

Grants

Loans

private inv estment

Exports

Weather

Model

1

B Std. Error

Unstandardized

Coeff icients

Beta

Standardized

Coeff icients

t Sig.

Dependent Variable: GDP growth ratea.

4.2 The model coefficients interpretation

Coefficient for Grants

1 = An increase in the Grants of one percentage point leads to GDP growth increase of

0.0000004696 percentage points ceteris paribus.

On the basis of the hypothesis mentioned hereunder;

Null hypothesis,

0H : Grants have no contribution on GDP growth.

Mathematically,

0: 10 H

Alternative Hypothesis,

aH : Grants have contribution on GDP growth.

Mathematically,

aH : 01

From the table above, the value of t ratio is 0.155. This value is compared with the value of t

read from the table at 5% level of significance and 11degreee of freedom which is 2.202. Since

the t-value calculated is less than the t- value tabulated, we accept null hypothesis and conclude

that, the predictor amount of grants received do not account for the variability of the dependent

52

variable GDP growth. Therefore, we conclude that the amount of grants provided by donors have

no contribution on GDP growth.

Coefficient for Loans

2 = An increase of the loan of one percentage point leads to GDP growth decrease of

0.00000532 percentage points ceteris paribus.

On the basis of the hypothesis mentioned hereunder;

Null hypothesis,

0H : Loans have no contribution on GDP growth.

Mathematically,

0H : 01

Alternative Hypothesis,

aH : Loans have contribution on GDP growth.

Mathematically,

0: 1 aH

From the table above, the value of t ratio is -1.616. This value is compared with the value of t

read from the table at 5% level of significance and 11degreee of freedom which is 2.202. Since

the t-value calculated is less than the t- value tabulated, we accept null hypothesis and conclude

that, the predictor amount of Loans received do not account for the variability of the dependent

variable GDP growth. Therefore, we conclude that the amount of Loans provided by donors have

no contribution on GDP growth.

Coefficient for Private sector investments

2 = One percent increase in percent of private sector investments is increase the percent of

GDP growth by 0.0000005508 units ceteris paribus.

On the basis of the hypothesis mentioned hereunder;

Null hypothesis,

0H : Private sector investments have no contribution on GDP growth.

Mathematically,

0H : 01

53

Alternative Hypothesis,

H1: Private sector investments have contribution on GDP growth.

Mathematically,

0: 1 aH

From the table above, the value of t ratio is 0.339. This value is compared with the value of t

read from the table at 5% level of significance and 11degreee of freedom which is 2.202. Since

the t-value calculated is less than the t- value tabulated, we accept null hypothesis and conclude

that, the predictor amount of private sector investments do not account for the variability of the

dependent variable GDP growth. Therefore, we conclude that the amount of private sector

investments have no contribution on GDP growth.

Coefficient for exports

4 = A unit increase in export is lead to 0.000003262 increases in percent GDP growth ceteris

paribus.

On the basis of the hypothesis mentioned hereunder;

Null hypothesis,

0H : Exports have no contribution on GDP growth.

Mathematically,

0H : 01

Alternative hypothesis,

aH : Exports have contribution on GDP growth.

Mathematically,

0: 1 aH

From the table above, the value of t ratio is 1.385. This value is compared with the value of t

read from the table at 5% level of significance and 11degreee of freedom which is 2.202. Since

the t-value calculated is less than the t- value tabulated, we accept null hypothesis and conclude

that, the predictor amount of exports do not account for the variability of the dependent variable

GDP growth. Therefore, we conclude that exports have no contribution on GDP growth.

Coefficient for weather

54

5 = Favourable weather is lead to 1.764 increases in annual percent GDP growth ceteris

paribus.

On the basis of the hypothesis mentioned hereunder;

Null hypothesis,

0H : Weather has no contribution on GDP growth.

Mathematically,

0H : 01

Alternative hypothesis,

aH H1: Weather has contribution on GDP growth.

Mathematically,

0: 1 aH

From the table above, the value of t ratio is 4.354. This value is compared with the value of t

read from the table at 5% level of significance and 11degreee of freedom which is 2.202. Since

the t-value calculated is greater than the t- value tabulated, we reject null hypothesis and

conclude that, the predictor favourable weather account for the variability of the dependent

variable GDP growth. Therefore, we conclude that favourable weather has a significant

contribution on general economic growth GDP.

4.3 Discussions on the Regression Results for Specific Variables

4.3.1 Overall Model

The estimation results show that the goodness of fit of the model is satisfactory as shown by R-

square of 89.4 percent. It implies that 89.4 percent of variation in GDP growth rate is explained

by the predetermined variables included in the equation. This shows that there is a linear

relationship between the predetermined variable and the endogenous variable.

4.3.2 Grants

The coefficient of grants bears a positive sign but statistically insignificant. Foreign aid in form

of grants is likely to hinder the economic growth for some reasons. In Tanzania the institutional

environment is distorted, aid has been fungible into financing the government‟s consumption

55

instead of being effectively invested. Foreign aid reduces long-run capital accumulation and

labor supply (Gong and Zou, 2001). Moreover, depending on the marginal propensity to spend

on the export goods and the conditions of aid, the foreign aid can possibly improve the donor‟s

terms of trade while make the recipient worse off (Krugman and Obsfeld, 2003).

The negative relation between aid and growth is nothing new in the aid literature and this is just

additional evidence. However, it is noteworthy that the coefficient of aid is highly not

significant .This results force us to think more carefully about how to improve the effectiveness

of aid. Therefore reforms are certainly necessary, not only for recipients but also for donors. Aid

is more effective when it is used to facilitate timely and efficiently the reforms initiated by the

local governments, and not imposed by outsiders. What aid does is “to help good governments to

survive long enough to solve the problems” (World Bank, 1998).

In Tanzania there may be problems in the present aid providing system. There are a number of

underlying causes, such as the fungibility of aid, aid dependency, bad economic management,

corruption and poor coordination and cooperation among aid agencies etc. This shows that large

amount of aid does not necessarily guarantee growth. What really matters is the quality of aid.

From donors‟ side, it requires the appropriately designed programs, timely and sufficient

disbursement, good conditionality and strict penalty upon deviation or violation etc. From the

recipients‟ side, it requires good macroeconomic management and institutions. These actually

are problems, with which Tanzania is facing now. The present coordination and cooperation

among donors is problematic. Most of donors and aid agencies have their own objectives and

different plans in providing aid. Therefore, instead of cooperating, they are normally stepping on

each other‟s toes by undertaking different approaches. As a result, the overall aid effectiveness

on the growth of the nation most of the time fails to succeed, even though many aid projects are

assessed effectively. This explains why Tanzania though receives so much aid from different

resources, still stagnate economically over time.

Consequently, Widespread corruption by government officials for example a shameful scandal

of Richmond and External Payments Arrear (EPA) which involved top officials and fungible aid

may be answers to why foreign aid have not stimulated economic growth in Tanzania. Donors

should design better assessment criteria and conditionality must be applied, in providing aid

56

otherwise grants should be postponed or even terminated unless further positive evidence is

accorded.

4.3.3 Loans

The coefficient of Loans bears an unexpected negative sign and statistically insignificant. This

could be because since loan is debt creating mechanism and currently the debt has grown to

unsustainable level the negative sign could be reflection of the short and long term effect of debt

on GDP growth. The performance of the export sector has failed to meet foreign debt obligations

as such a new loan is contracted to debt service. This can be evidenced by the presence of

Multilateral Debt Relief Fund (MDF) as one of the options and the Highly Indebted Poor

Countries Initiative (HIPC) where Tanzania is one of the beneficiaries. The government should

refrain from contracting new loans especially to support recurrent expenditure and unproductive

expenditure example purchase of military hardware. It should borrow to finance projects with

greater multiplier effect to the economy.

4.3.4 Private Sector Capital Formation

The coefficient of private sector capital formation bears a positive sign but statistically

insignificant. The model shows that capital formation invested is positively related with GDP

growth rate keeping other factors constant. This shows that capital formation is a crucial

component of economic growth of any country. In the short run resources may be under utilized

as capital output ratio increases in such a way that output decreases with capital formation. Over

the long run, however, increased capital formation is be associated with economic growth.

In Tanzania private sector has been affected by poor existing infrastructure such as roads,

electricity and water and also corruption and unnecessary bureaucracy. However macroeconomic

reforms have failed to attain stable macroeconomic with low inflation, optimal tax rate, optimal

interest rate etc. These might be the reasons to why private sector capital formation seem not to

contribute to economic growth.

4.3.5 Exports

57

The coefficient of exports bears a positive sign but statistically insignificant. This could be

because the government lacks seriousness in promoting export sector. The export sector has been

frustrated by lack of clear policy and incentive packages that allow for competitiveness of

produced goods at the world market this might be the reason to why the export sector seem not to

contribute to economic growth as the empirical findings show.

4.3.6 Weather

The coefficient of weather bears a positive sign and is statistically significant. This is because

weather plays an important role to the economic growth of less developed countries, whose

economies depend on agriculture. Tanzania economy is highly dominated by the agricultural

sector, which is heavily dependent on rainfall. The agricultural sector contributes about 48% of

GDP. Therefore the government should shift from depending on rainfall to irrigation based

agriculture. Under the current Poverty Reduction Strategy Programme, the agricultural sector is

one of the priority sectors by government and donor community interms of resources allocation.

The government should use this opportunity to improve farming technology by embarking on

irrigation schemes to reduce dependence on rainfall. Tanzania is endowed with rivers and lakes

that if effectively utilized could improve agricultural production for both food and cash crops

hence the contribution of agriculture on GDP would be more than it is today i.e. 48%.

58

CHAPTER 5

CONCLUSION AND POLICY IMPLICATIONS

5.1 Introduction

The theory postulates that foreign aid plays a significant positive role to the economic growth of

developing countries, since many developing countries lack capital to build a sustainable

economic growth. It was, therefore assumed that foreign aid is an essential source of capital.

5.2 Summary of the findings

The econometric results have shown that foreign aid in the form of grants and loans both are

statistically insignificant in relation with GDP growth. This implies that the growth of the

economy is not influenced by the magnitude of foreign aid in the form of grants that Tanzania

has been attracting. Conversely, loan has shown to be negatively related with GDP growth and

statistically insignificant. This could be a reflection of short and long term effect on economic

growth and investment. As the debt service obligation increase the amount of resources

earmarked for investment decline affecting the overall economic growth.

The economic growth of Tanzania is highly influenced by weather. The regression results have

indicated how favourable weather positively affects economic growth. Good weather condition

encourage food and cash crop production hence increase of foreign earnings, impacting

positively on the economic growth. Furthermore, the regression results have shown the positive

sign of private sector capital formation in influencing GDP growth but statistically insignificant.

This could be because macroeconomic reforms have failed to attain stable macroeconomic with

low inflation, optimal tax rate, and optimal interest rate etc. Exports show a positive relationship

to GDP growth but statistically insignificant. This could be because the government lacks

seriousness in promoting export sector.

5.3 Policy Implications

The negative relation between aid and growth is nothing new in the aid literature and this is just

additional evidence. However, it is noteworthy that the coefficient of aid is highly not significant

.This results force us to think more carefully about how to improve the effectiveness of aid.

59

Therefore reforms are certainly necessary, not only for recipients but also for donors. Aid is

more effective when it is used to facilitate timely and efficiently the reforms initiated by the local

governments, and not imposed by outsiders. What aid does is “to help good governments to

survive long enough to solve the problems” (World Bank, 1998). Grants should be postponed or

even terminated unless further positive evidence is accorded.

Consequently, widespread corruption by government officials for example a shameful scandal of

Richmond and External Payments Arrear (EPA) which involved top officials and fungible aid

might be the reason to why foreign aid has not contributed to GDP growth. The policy

implication here is that for Tanzania, the money aid is necessary but the idea aid is even more

important.

It would be more sustainable if aid supports the policymakers training or education and then

nurtures institutional reforms initiated by these well-trained policymakers. There may be an

urgent need of a special mechanism for Tanzania to focus on education reforms based on

successful cases of some countries. Leaders in Tanzania should play an active role in initiating

and sustaining anti-corruption campaigns, public administration and legal system reforms.

By and large, there are many things that need to be improved by both donors and recipients. For

recipients, the policy and institutional environment must be improved with livingness and a

strong commitment to reform. For donors, better assessment criteria and conditionality must be

applied, i.e. better designed programs, more efficient coordination and cooperation and last but

not least, the reforms of aid agencies.

It has been observed that loan is negatively related with GDP growth. This could be because of

government failure to refrain from contracting new loans especially to support recurrent

expenditure and unproductive expenditure example purchase of military hardware. It should

borrow to finance projects with greater multiplier effect to the economy.

The government should encourage private sector capital formation by improving the existing

infrastructure such as roads, electricity and water and also do away with corruption and

unnecessary bureaucracy that affect the private sector. The government could also continue with

macroeconomic reforms to attain stable macroeconomic with low inflation, optimal tax rate,

60

optimal interest rate etc. These deliberate measures and others is encourage private sector capital

formation.

Favorable weather is one of the major factors to agricultural sector in Tanzania, since agriculture

is the backbone of the economy there is a need to shift from dependence on rainfall to irrigation

based agriculture. Under the current Poverty Strategy Programme, the agricultural sector is one

of the priority sectors which receive maximum attention from government and donor community

in terms of resources allocation. The government should use this opportunity to improve farming

technology by embarking on irrigation schemes to reduce dependence on rainfall.

The government should be serious in promoting the export sector by formulating clear policy and

incentives packages that is allow for competitiveness of produced goods at the world market.

5.4 Concluding Remarks

There are a number of underlying causes, such as the fungibility of aid, aid dependency, bad

economic management, corruption and poor coordination and cooperation among aid agencies

etc. This shows that large amount of aid does not necessarily guarantee growth. What really

matters is the quality of aid. From donors‟ side, it requires the appropriately designed programs,

timely and sufficient disbursement, good conditionality and strict penalty upon deviation or

violation etc.

From the recipients‟ side, it requires good macroeconomic management and institutions reforms.

These actually are problems, with which Tanzania is facing now. Therefore, aid programs should

be designed in such a way that they support country‟s own capacity in management.

Policymakers training, intensive human capital investments and better partnership between donor

community and local governments should be first priorities. Needless to say, fighting against

corruption and aid dependency is extremely important. In short, the initiative and strong

commitment of local governments is a necessary condition whereas the appropriate and efficient

assistance from donor community is the sufficient condition to make aid work effectively in

Tanzania.

61

REFERENCES:

Ali, A. Malwanda, C., and Suliman Y. (1999). “Official Development Assistance to Africa an

overview” Journal of African Economies Vol.8, No. 4:504-527.

Bagachwa et al (1997), “A Study of Aid Effectiveness in Tanzania: The case of Danish Ai”,

Centre for Development Research, Copenhagen.

Balogh, T. (1997), “Multilateral versus Bilateral Aid” Oxford Economic paper. Vol 19.

Boone, P. (1994) “The Impact of Foreign Aid on saving and

Growth”, Mimeo (London school of Economics).

Boone, P. (1996) “Politics and the effectiveness of foreign Aid”, European Economic Review,

vol.40, pp 289-328.

Cashel-Cordo, P and Craig, S. (1990), “The public sector impact of International Resorce

Transfer”, Journal of Development Economics, Vol.32.

Chenery, H. Adelman, I and Strout, A.M. (1990), “Foreign Aid and Economic Development”:

The case of Greece, Review of Economics and Statistics, February.

C de Barra (2005), Addressing Aid Effectiveness: “A Key Challenge in Meeting the MDG”

Trócaire Development Review, Dublin.

Durbarry, Ramesh, Norman Gemmell, and David Greenway, 1998, “New Evidence on the

Impact of Foreign Aid on Economic Growth”, CREDIT Research Paper

No. 98/8 (Centre for Research in Economic Development and

International Trade, University of Nottingham.

European Aid and ODI, 2003, “Proposed Evaluation Framework for Direct Budget Support Part

I”: Framework for Country-Level Case Studies" Draft Report to the

OECD/DAC Technical Working Group on Evaluation of Budgetary Aid.

Gong,Liutang and Zou, Heng-fu (2003). “Foreign Aid Reduces Labour Supply Capital

Accumulation.” Review of Development Economics, 5(1), PP 105-118.

Gujarati, N. D. (1995) Basic Econometrics. Third Edition, McGraw-Hill International Edition.

Helleiner, Killick, Lipumba, Ndulu and Svendsen, (1995); “Report of the Group of Independent

Advisers on Development Co-operation issues Between Tanzania and its

Aid Donors”. Ministry of foreign affairs, Tanzania.

62

Helleiner et al (1995), “Report of the Group of Independent Advisors on Development

Cooperation Issues between Tanzania and its Aid Donors”. Copenhagen,

Denmark.

Helleiner S, (1999); “Changing Aid Relationships in Tanzania.” December 1997 through March

1999. World Bank.

Independent Monitoring Group (2002), “Enhancing Aid Relationships in Tanzania”, Dar-es-

Salaam.

Independent Monitoring Group (2005), “Enhancing Aid Relationships in Tanzania”, Dar- es-

Salaam.

IMF, 2003, “Tanzania: “sixth Review under the Poverty Reduction and Growth Facility (PRGF)

and Requests for Waiver of a Performance Criterion and for a New Three-

Year Arrangement under the PRGF”, IMF Report No. 03/238,

Washington, DC (14 July )

Killick, Tony 2004, “Politics, Evidence and the New Aid Agenda,” Development Policy Review

Krugman, Paul R. and Obsfeld, Maurice (2003). “International Economics: Theory and policy.”

Pearson Education, Boston, USA.

Kwabena, G. B. (1992) “Aid and Economic Growth in LDCs: Evidence from Sub-Saharan

Africa”, The Review of Black Political Economy, vol.20 No. 3.

Lancaster. C (1999), “Aid Effectiveness in Africa: The Unfinished Agenda”, Journal of African

Economies Vol.8.

Ministry of Planning, “Economy, and Empowerment (2006), Millennium Development Goals

Progress Report”, December 2006 Dar es Salaam.

Moshi, H.P.B, 2003, “Poverty Reduction in Tanzania: The Role of Private Sector”, Dar es

Salaam

Mushi, S. (1980) “Aid and Development: An Overview of Tanzania’s Experience in Aid and

Development: some Tanzania Experiences”. Oslo: Norwegian institute of

international Affairs, 9-150.

Mutahaba, G. (1989) “Foreign Assistance and Local Capacity Building”, The European Joural

of Development Research 1(1): 108-123.

NGO Policy Forum, 2003, “Public Expenditure Review Consultative Meeting”: NGO

Commentary”, Dar es Salaam

63

Nyoni, T.S. (1997) “Foreign Aid and Economic performance in Tanzania, AERC Research

paper No 61”. Africa Economic research Consortium, Nairobi.

OECD-DAC (2005a), “Harmonising Donor Practices for Effective Aid Delivery: Volume 2:

Budget Support, Sector-wide Approaches, and Capacity Development in

Public Financial Management”. A DAC Reference Document, DAC

Guidelines. www.oecd.org/dac/harmonisingpractices.

(OECD) DAC (1996), Shaping the 21st Century: “The Contribution of Development

Cooperation”.

Paris Declaration on Aid Effectiveness, (2005) PRBS and URT, 2003, “Tanzania Joint PRBS

and PRSC Annual Review Report,” Dar es Salaam

Renzio (2004), “Incentives for Harmonization and Alignment in Aid Agencies”, Rome

Declaration 2003

The Congress of the United States (1997), “The Role of Foreign Aid in Development”, United

States.

Tanzania, URT of (2006) “Economic survey, Ministry of Finance and Economic Affairs”, Dar es

Salaam: Government Printers.

United republic of Tanzania (URT) (2001) “Tanzania Assistance Strategy Paper (PRSP)”.

Prepared for the consultative group meeting Ministry of Finance.

United Nations (2002), “Report of the International Conference on Financing for Development”,

Monterrey, Mexico, 18-22 March 2002, New York.

United Republic of Tanzania (2002), “Tanzania Assistance Strategy”, Government Printers, Dar

es Salaam

URT 2002b, “Poverty and Human Development Report 2002”, Dar Es Salaam: Mkuki na Nyota

Publishers

United Republic of Tanzania (2005), “TAS Implementation Report FY 2002/03- 2004/05”, Dar

Es Salaam.

United Republic of Tanzania (2006), “Joint Assistance Strategy for Tanzania”, Dar es Salaam.

URT (2005), “National Strategy for Growth and Reduction of Poverty”, Dar es Salaam.

URT,” National Vision 2025”, Dar es Salaam.

United Republic of Tanzania (2000), “Public Expenditure Reviews for FY 02”, Education sector,

Dar es salaam

64

URT 2003, “Tanzania Assistance Strategy Implementation Report FY 2002/ 03”, Dar es Salaam

World Bank and the IMF (2001),”Financing for Development”, Washington.

Waweru, J. (1995) “Foreign and economic development in Kenya”, M. A Thesis, Department of

Economics, University of Dar es salaam.

World Bank, (1996) “Taking Action for poverty reduction of an African region Task Force”,

May.1996

World Bank, (1998), “Assessing Aid: What Works, What Doesn’t, and Why?” (Washington:

World Bank).

World Bank, 2003a, “United Republic of Tanzania Expenditure Review FY03: Managing

Public Expenditures for Poverty Reduction, Report on Fiscal Development

and Public Expenditure Management Issues”, Washington

APPENDIX

LIST OF FIGURES AND TABLES

Figure 1: Four Priority Areas of the TAS Action Plan

Source: TAS Implementation Report (2005)

1. Improving the predictability of aid flows.

This pr i or i ty a rea concerns the t imel y

prov i s ion of a i d commi tment s over a

ro l l i ng th ree - yea r MTEF per i od as wel l as

t imel y di sbur sement s in l i ne wi th

commitment s . I ncompl et e and l at e

in f ormat i on on expect ed a id f l ows as wel l

as f unding de l ays or even compl et e non -

di sburs ement of commit t ed funds

undermines na t iona l budget p l anni ng and

execut i on .

2. Integrating external resources in the Government budget

system.

Integrating external funds into the Government budget concerns

both ex ante, and ex post budgeting. Ex post, it entails

recording expected aid flows in the national budget estimates in

order to obtain a comprehensive Government budget planning. Ex

post, it means the channeling of external resources through the

Exchequer system in order to allow the Government to fully

capture actual expenditure of external finance, to account for

them and assess their impact. TAS PRIORITY AREAS

3. Harmonizing and rationalizing processes.

Multiple and overlapping processes, missions, review,

meetings and studies place undue burden and increase

transactions costs on both the Government and

Development Partners. Under TAS, the Government and

Development Partners aim to harmonize and

rationalize their processes around the national budget

and the Poverty Reduction Strategy.

4. Capacity building for aid coordination and external resource

management.

Capacity building for aid coordination and external resource

management has been recognized as a key area to enable the

Government and domestic

Stakeholders to take effective ownership of the development process,

TAS addresses capacity building throughout the Government at

national, regional and local levels as well as across society.

65

Figure 2 : Major clusters of poverty reduct ion outcomes.

Source: National Strategy for Growth and Reduction of Poverty (2005)

Table 1: Development Partners contributing to GBS

Agency Percent

African Development Bank 11.2

Canada 3.3

Denmark 2.3

European Commission 7.4

Finland 1.6

Ireland 2

Japan 0.7

Germany 1.5

Netherlands 3.8

Norway 4.2

Sweden 6.2

Switzerland 0.7

United Kingdom 24.9

World Bank 30.3

Total 100

Source: Ministry of Finance (2005)

Reduction of Poverty

Good governance and accountability

Growth and reduction of income

poverty

Improved quality of life and

social well being

66

Table 2: Definitions of Direct, General and Sector Budget Support

Direct budget support refers to the channelling of donor funds (as grants or concessional loans) to the

budget of a partner government using its own allocation, procurement and accounting systems. The

transfer is „direct‟, in the sense that it is provided as foreign exchange to Government (concretely the

Central Bank, who then credit the Central Government or Treasury account), with no controls over the

process of conversion into local currency.

Within this overall definition, General Budget Support covers financial assistance as a contribution to

the overall budget with any conditionality focused on policy measures related to overall budget priorities.

Within this category funds may be nominally accounted for against certain sector but there is no formal

limitation on where funds may actually be spent.

Sector Budget Support covers financial aid earmarked to a discrete sector or sectors, with any

conditionality relating to sectors. Additional sector reporting may augment normal government

accounting, although the means of disbursement is also based upon government procedures.

SOURCE: OECD-DAC, Evaluation Framework for General Budget Support: Framework for Country-

level Cases studies, Report to the OECD-DAC Evaluation Network, February 2004

Table 3: Timetable for External Resources Projections Data

Timing Activity

End September Deadline for Development Partner submission of commitments and projection data

October Consolidation and submission of data to sector ministries

November

Detailed discussions with sectors, and reconsolidation of data following revisions by sectors and

submission to BGC for input into the Budget Guidelines

January-February Final Revisions by Development Partners of projections (budget support and basket funds)

March-April Consolidated data submitted for inclusion in the National Budget

Source: Tanzania Assistance Strategy Implementation Report 2002-2004

Table 4: Results for the Quantitative Method of Analysis Applied

Estimation method 2SLS

Variables GDP growth from 1968-1987

DU -0.6855

Investment 0.0036

Export 0.0342

ODA 0.0055

NCI 0.0025

Source: Mafwenga H.M as per author survey (Research for MBA at ESAMI Business School)

67

Table 5: Duration/Overall Research Project Time Plan and Activity

S/No Activity 2007/08 2008/09 2009/10

1 Methodological and Literature review

2 MBA Proposal writing, approval and full admission

3 Phase 1 Data Collection, analysis and Interpretation

4 Phase 2 Data Collection, analysis and interpretation

5 Discussion of findings, presentation and thesis compiling

6 Presentation, Viva Voce, Finalization and Submission