Aid and Economic Performance - The Case of Tanzania

Abstract: The objective of this study is to contribute to the knowledge about the effects of foreign aid in Tanzania during the period 1964-93. However, such a study is also relevant from a more general perspective since the results can hopefully be relevant for other aid-recipient countries. Chapter 2 presents the size, forms, and allocation of the foreign aid inflow to Tanzania during the four aid regimes. The Dutch Disease theory states that large capital inflows, such as an inflow of foreign aid, should give rise to an appreciation of the real exchange rate. In Chapter 3 we present the Dutch Disease theory, calculate real exchange rate indexes and test econometrically the Dutch Disease theory in the case of Tanzania. The impact of aid depends also on its forms. Different forms of aid give rise to different effects that may counteract each other. In Chapter 4 the effects of different forms of aid on the resource allocation are analysed. For this purpose we develop a general equilibrium four-sector model which will allow us to explicitly consider a subsistence sector in addition to the formal sectors of the economy. Here our analysis differs from the three-sector framework normally used in Dutch Disease models. How then do the 'predictions' of our model analysis correspond to the actual Tanzanian development? In Chapter 5 we analyse in our four-sector model the expected effects of the aid inflow to Tanzania on the basis of the information provided in Chapter 2. Then we compare the expected effects with the actual development of the Tanzanian economy during the four aid regimes. Which are then the determinants of aid? Chapter 6 briefly analyses some political economy factors that shaped aid to Tanzania.