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4 The Informal Economy and the Politics of Economic Reform
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The Informal Economy and the Politics of Economic Reform

When Tanzania went to the Washington-based institution after years of resisting, the International Monetary Fund (IMF) said like Shylock to Antonio 'Ah, at last you have come.' As it turned out, Antonio could not repay the loan. Shylock then demanded his pound of flesh…. Of course, sometimes we cannot repay the debt and, of course, the IMF demands its pound of flesh…. The IMF is now a tool to control the Governments of the Third World.
Daily News, 10 June 1988, quoting Party Chairman Julius Nyerere

The pound of flesh usually demanded by Shylock [IMF] will be taken without shedding a drop of blood.
Daily News , 29 July 1986, quoting President Ali Hassan Mwinyi

By the mid-1980s two broad coalitions had emerged in Tanzania, one led by those favoring economic reform and the other led by those who wanted to see more modest changes at a slower pace. The reformists, who had coalesced around the government, prevailed over opponents of reform, who had aligned themselves more closely with the party.[1]

However, when Tanzania embarked on its path of economic reforms, neither supporters nor detractors of these new policies had accounted for one crucial factor that would explain why the austerity measures of the reform program were met with so little resistance among the sectors of society they affected the most: workers and civil servants. What they had not accounted for were the survival strategies within the informal economy. These strategies emerged with the crisis in the late 1970s and continued to sustain people through the reform period, which began in earnest in the mid-1980s (see chapter 2).

Neither coalition had sufficiently considered how the crisis would force people to devise their own means of coping through income-generating projects. Julius Nyerere, who was party chairman at the time, explained why he did not want an agreement with the IMF, saying in 1985 that the price of such an agreement "would be riots in the streets of Dar es


Salaam!"[2] In contrast, President Ali Hassan Mwinyi and those pushing for an IMF agreement believed that the government's refusal to come to an agreement would result in a similar crisis of confidence. When Mwinyi finally concluded the agreement with the IMF in 1986, the riots in the streets never materialized. The government's meager wage increases at a time of soaring inflation made little difference to Tanzania's urban dwellers because by the late 1980s wages accounted for little more than 10 percent of household income in the poorest families. The prospects that the government would increase wages to keep up with the cost of living were so slim that workers had long since given up on their demands for wage increases. Until the 1960s Tanzania had a vibrant labor movement which fought vigorously and successfully to raise wages and keep them in line with the cost of living. The ruling party's elimination of this independent labor movement since the 1960s, coupled with the state's inability to guarantee adequate wages, had made fighting for meaningful wage raises almost pointless. Workers had realized that even if they were to resist openly, little would come of it. Were the government to cut the pie up in a different way, workers would not necessarily receive any more than they already had. The cupboard marked "state resources" had been bare for quite some time. By the 1980s workers' energies were devoted to increasing their incomes off the job rather than mobilizing for pay increases on the job. Wages merely supplemented their informal businesses.

The fact that workers and civil servants were relying not on their official wages but on their income-generating activities was an important factor in facilitating the ascendancy of the economic reformers and their policies. Those pushing for economic restructuring were bolstered by the popularity of the 1984 import-liberalization measure and by the 1986 agreement with the IMF that brought with it an infusion of foreign exchange. Tanzania's economic situation was so severe at that point that the government had little choice but to conclude an agreement with the IMF. But government leaders were also able to go through with their reforms because the urban population, which had the most to lose from government policies, did not pose any serious opposition. Meanwhile, the government had become more responsive to popular pressures to loosen restrictions on small businesses (see chapter 6). Although this loosening was carried out slowly and reluctantly, it bought government leaders sufficient time to implement what otherwise were unpopular restructuring policies and austerity measures. This coalescence of external and internal factors created the conditions for the liberalization measures to be initiated and sustained.


In this chapter I look at the emergence of divisions within the leadership over the direction and pace of economic reform. I explain how alliances were consolidated; how various sectors of society lined up behind the two coalitions; and, finally, the political implications of the intra-elite conflicts.

Emerging Differences: 1980–1985

The initial liberalizing measures aimed at coping with the crisis were not effective, but they opened the door to more sweeping reforms. By the end of the 1980s Nyerere had begun to respond to some of the pressures for economic reform by initiating two relatively unsuccessful programs: the National Economic Stabilization Programme in 1980 and the Stabilization and Adjustment Programme in 1982. He downgraded the crop authorities to marketing boards and reinstated cooperatives in 1982 in an attempt to diffuse the monopolistic power of the crop authorities.[3] He also initiated trade liberalization in 1984 as a temporary measure to relieve the crisis in the shortages of consumer and capital goods. In May 1985 Tanzania began to sell twelve sisal estates run by the Tanzania Sisal Authority and began to talk about privatizing large commercial farms, which had experienced difficulties allegedly due to management problems.[4]

Some have explained Nyerere's shift toward economic liberalization two years before his retirement as president as an attempt to influence the course of reform because he realized that reform was inevitable. It was known that all three presidential candidates under consideration prior to 1985 had gained popularity from endorsing liberalizing measures. If selected, they would undoubtedly pursue this course with greater vigor. The late Premier Edward Sokoine liberalized the importation of pickup trucks; Salim Ahmed Salim announced the liberalization of secondhand-clothes imports; and Ali Hassan Mwinyi, then president of Zanzibar, had energized the island's ailing economy by liberalizing all imports (Maliyamkono and Bagachwa 1990, 115).

This new direction in policy making was not a concession on any ideological front or an attempt to transform the socialist orientation of the country. Nyerere was under pressure from forces advocating aggressive liberalization measures by the time he stepped down from the presidency. Moreover, foreign donors had made their continued support contingent on the conclusion of an agreement with the IMF. Reformist leaders realized that Tanzania had little choice but to submit to external pressures or face the collapse of the entire formal economy.


Mwinyi's choice as presidential successor to Nyerere in 1985 sheds some light on the lines that were being drawn within the leadership. Mwinyi represented a compromise between contending forces that were increasingly becoming polarized between the leadership of the government and of the party. Mwinyi was favored over the more reformist-minded Prime Minister Salim Ahmed Salim and the staunchly antireformist party Secretary General Rashidi Kawawa. It was suggested at the time that the selection of either Salim or Kawawa for the presidential seat might have led to a split in the party. Kawawa represented the senior party members closely tied to the state bureaucracy, whereas Salim represented those seeking greater involvement of market forces in the economy (Addison 1986). Pressures from the military played a part in eliminating Kawawa as a possible candidate. Salim, though popular among Tanzanians, did not have the same ties to the old-guard party leadership who had built strong allegiances during their years at Pugu, Minaki, and Tabora secondary schools or at Makerere University.[5] Although these were contributing factors, they could not have been decisive in eliminating Salim as a candidate; Mwinyi, who was ultimately chosen, was also not affiliated with the "old-boys' network." It is likely that the conflict between the islands of Zanzibar and Pemba (to the north of Zanzibar) and the constitutional necessity of having a Zanzibari represented in the top leadership either as president or vice president eliminated Salim, who was born in Pemba. Mwinyi, on the other hand, was from Zanzibar. He was perceived at the time as a moderate, a unifier of contending forces, yet one who had a record of successfully initiating various economic reforms on Zanzibar while president.

A similar conflict was played out over who was to be nominated as president of Zanzibar. One group supported Seif Sharif Hamad, who had been Zanzibar's chief minister since 1984 (Hamad later became vice chairman of the Civic United Front Party). Hamad, along with Mwinyi, Zanzibar's president since 1982, had encouraged foreign investment in Zanzibar, had liberalized trade, and had started to retreat from state interventionism in the economy a few years before the mainland did. Hamad's supporters included leaders like Salim A. Salim, Col. Adam Mwakanjuki, Machano Khamis, Hamad Rashidi Mohamed, Soud Mgeni, Suleiman Hamad, Shaaban Mloo, and Ali Pandu.

The other group, which was linked to antireformist forces on the mainland, backed Idris Abdul Wakil. Wakil claimed the nomination for presidency in 1985 but won the election by a close margin. Whatever popularity Wakil could claim in Zanzibar at that time he soon lost after the


election. The Zanzibari leaders who backed Wakil came to represent a forceful bloc within the party's Central Committee. They included Brig. Abdallah Said Natepe, Ali Mzee Ali, Hassan Nassor Moyo, and Salmin Amour. These men were especially suspicious of Hamad and Salim, who had a strong political base in Pemba, which had always maintained close informal economic and cultural links with the Middle East. They argued that these men would bring Arab sheikhs from the Persian Gulf to Zanzibar and reintroduce capitalism. In 1988 they engineered the ouster of Seif Sharif Hamad and five others on charges of sabotaging the party and destabilizing the Tanzania-Zanzibar union.[6]

Deepening Rifts: 1985–1990

Not until Mwinyi took over as president of Tanzania in 1985 did the real conflicts over the direction and speed of economic reform heat up. Mwinyi endorsed the 1986 Economic Recovery Program (ERP), which attempted to revive output, lower the trade and budget deficits, and reduce inflation. The ERP was used as a basis for negotiations with the IMF later that year. The agreement with the IMF, in particular, exacerbated the conflicts between the two coalitions, becoming a major point of contention, as I will show later in this chapter.

It was significant that Nyerere retained his post as chief of the ruling party after he left the presidency, even though on earlier occasions he had argued that the separation of the presidency of the nation and the party chairmanship could only lead to disunity. The joint position of party chairman and the president of the republic had been one way of ensuring party supremacy, which was enshrined in the constitution in a 1975 amendment subordinating the National Assembly (parliament) to its leadership. Party supremacy was reinforced by the party's 1977 constitution, which stated that "All activity of the organs of the state of the United Republic shall be conducted under the auspices of the Party." The National Assembly was also subordinated to the party's largest ruling body, the National Executive Committee (NEC), where all major policy decisions were made (Mlimuka and Kabudi 1985, 64; Pratt 1979, 221).

Nyerere's nomination and reelection as party chairman in 1987 bewildered many Tanzanians, who had expected him to step down, as he had earlier indicated he would. His reelection further exacerbated the political differences between the party and government. Nyerere's bid for reelection as party chief can be accounted for by a number of different pressures coming especially from the party old guard, who believed that their own


political careers would be threatened by Nyerere's departure. Many within the NEC owed personal allegiance to him. Some of them were skeptical of the economic policies advocated by what they called capitalist roaders and felt that Nyerere was needed to act as a counterweight to these new forces for change. Among those pressuring Nyerere to remain party chairman were a group of influential regional party chairmen from Arusha and Mwanza. Sections of the military also exerted pressure on Nyerere to stay. Finally, Nyerere himself may have been concerned about the impact of his departure from the political scene on the union between Tanzania and Zanzibar, which had been showing increasing signs of strain.

At the NEC meeting that followed the 1987 party congress, the old guard asserted itself again by dropping two reform-minded Central Committee members, Finance Minister Cleopa Msuya and Zanzibar's chief minister, Seif Sharif Hamad. The removal of Hamad was an especially transparent power play because at the 1982 congress the Zanzibari chief minister was automatically guaranteed a position on the Central Committee. Mwinyi responded by removing three antireformist party leaders from the Cabinet, beginning with Minister of Local Government and Cooperatives Kingunge Ngombale-Mwiru, who took over the party's Ideology and Education Section. This was followed by the move of Gertrude Mongella from minister of lands, natural resources and tourism to minister without portfolio. Daudi Mwakawago was relieved of his position as minister of industry and trade to be in charge of the party's propaganda and mass-mobilization department. These three leaders, in particular, were believed to have tried to obstruct Mwinyi's liberalization policies and block reforms that were tied to negotiations with the IMF.

Thus, as the party Central Committee eliminated reform-minded leaders from the Central Committee, the president reshuffled his Cabinet so that by March 1990 almost all those who were opposing reform measures had been ousted. Whereas in the past there was considerable overlap between the Central Committee and the Cabinet, by 1990 only Mwinyi and Prime Minister Warioba were represented in both bodies. Moreover, by this time the only reformist within the Central Committee, apart from the moderates Mwinyi and Warioba, was Salim Salim. Clearly, the way in which the membership of these two bodies was skewed reflected attempts to counterbalance the strength of various coalitions against each other.

The conflict between the party and the government was mediated by a military also divided over the issue of reform. In fact, prior to the signing of the agreement with the IMF, political commissars of the Tanzania People's Defense Forces (TPDF) and national service warned the government


not to accept IMF conditions because this "would bring about political and economic turmoil, disrupt unity, peace and tranquility in the country."[7] The Central Committee member in charge of defense, Col. Andrew Shija, presided over the meeting that made this declaration. Similarly, as I mentioned earlier, various generals were influential in persuading Nyerere to remain party chair in 1987, another indication of opposition to the reformist wing of the government.

Nyerere's close relationship with various groups within the armed forces had been carefully cultivated over the years. He had created a loyal network of officers in the army, field forces, police, prisons, and secret intelligence organizations. By promoting close associates within the army, he gained access to it and could freely visit the barracks without arousing suspicions.[8] He also promoted the armed forces to full and permanent representation in the National Executive Committee (NEC) of the party in 1987, giving them regional status like the other twenty-five administrative regions in the country.[9] The predominance of the army representatives in the armed forces seats in the NEC over the other sections of the armed forces (police, intelligence, prisons, national service) was also an indication of his need to make special concessions to this key component of Tanzania's power configuration.

But Nyerere's loyal supporters were not the only faction within the army. Mwinyi, mindful of the potential consequences of a divided military with one faction not entirely consolidated behind him, abolished the position of defense minister and took over the defense portfolio himself in September 1989, when the previous defense minister, Salim A. Salim, became secretary general of the Organization of African Unity. Salim's own popularity among the armed forces was an indication of the support for the reformists within the military. When former Prime Minister Edward Sokoine died in 1984, army officials were said to have pressured Nyerere not to appoint his closest ally, party Secretary General Kawawa, as prime minister and instead persuaded him to appoint Foreign Minister Salim A. Salim to the post.

Ideological Polarization

Many different interests underlay these competing groups, some ideological and some rooted in the different societal interests they represented. One side, for example, held that Tanzania's crisis was primarily the result of external factors, including drought, low commodity prices, rising prices of imports, and the war with Uganda. The reformists, in contrast, believed


that external factors had exacerbated the internal causes of crisis. They blamed much of the country's crisis on domestic policies like the excessive growth of government expenditures. As Damas Mbogoro, a key negotiator for Tanzania in its talks with the IMF, said, "I wouldn't say that our predicament was necessarily externally induced. The worst thing that can happen to an economy is to allow it to get into a stage when you can't manage things on your own, and therefore have to go to the Fund. Had we been putting certain macroeconomic policies in place all along, we would not be in this situation. That is the essence of the problem."[10]

As I mentioned earlier, the two sides were polarized over the IMF agreement. The party was hostile to the IMF because it feared that Tanzania's independence would be compromised by an agreement with the IMF and that it would have to submit to conditions that undermined the socialist orientation of the country. At one meeting of the NEC in February 1987, the IMF agreement was strongly condemned, and the finance minister was called in to defend his support of the IMF deal. The reformists saw the pursuit of external funding through the IMF as necessary to stave off a more serious economic crisis, but they differed with the IMF on many key issues. They opposed the speed with which the IMF had sought a devaluation of the Tanzanian currency and rejected IMF efforts to freeze wages, suppress government expenditure on social services, and cut back on the numbers of public institutions. They saw some, but not all, of the adopted reforms as responses to IMF pressures. To them, the process of economic reform was necessary for the economic survival of the country. As Prime Minister Warioba explained, "Measures such as reducing Government expenditure would have been taken because of the country's serious economic situation even in the absence of an agreement with the IMF."[11] Even Nyerere, who was most critical of the IMF's infringement on national sovereignty, defended his lifting of maize subsidies in 1984 by saying that it was not in any way influenced by the IMF and that it had been dictated purely by the current economic difficulties.[12]

Trade liberalization has been one of the most controversial policies. Initially it was implemented in 1984 as a temporary measure to relieve a commodity-starved population. A decade later there were few signs that it was about to be repealed. Those in favor of trade liberalization argued that it had compelled local industries to improve the quality of their produce and become more competitive. It had pushed the trading companies to become more consumer oriented. Likewise, they argued, it spurred higher agricultural production and enhanced political stability in the country, relieving the Board of Internal Trade of a public outcry over serious short-


ages, which had been endemic prior to 1984. Trade liberalization was said to have brought stability in price levels because goods were no longer so scarce. It opened up new avenues for revenue collection from import duties, sales taxes, and income taxes arising from imports under trade liberalization. Moreover, those supporting trade liberalization argued that it enabled the government to channel its precious foreign-exchange supplies to priority sectors, while private traders imported consumer and capital goods.[13]

Those opposed to trade liberalization said that it had increased the smuggling of livestock, hides, and precious stones in order to gain foreign exchange with which to import goods into Tanzania (Shivji 1992, 52). They expressed doubts over how private importers could sustain a constant flow of imports when they were selling their goods in local, nonconvertible currency.[14] They also argued that trade liberalization had hurt local industry, particularly the textile industry, which could not compete with cheap imports because of shortages of foreign exchange and subsequent shortages of inputs.

Nevertheless, once trade liberalization took affect the voices of those political leaders who were opposed to it were rarely heard. As one commentator observed, "Many Party and Government officials do not speak against liberalization for fear of losing popularity! Perhaps the only anti-liberalization voice has now and then been heard from the Party Chairman Mwalimu Nyerere and a few heads of parastatal organizations whose survival hinge on total monopoly."[15]

The role of the private sector was also intensely debated in Tanzania, a debate that went back at least as far as the 1967 Arusha Declaration (see chapter 7). Some top leaders accepted the private sector as a reality. These leaders felt strongly that the country would not progress unless individual initiative was unleashed in the form of the private sector, given the harsh economic conditions. Economic redistribution would be carried out through taxation of private initiatives. To be serious about self-reliance, they argued, meant that the private sector should be supported. Other leaders straddled the fence, pretending that these businesses did not exist. Holding on to past policies and ideological commitments, they hoped that the issues would go away. Yet a third group of leaders wanted to suppress the new growth of businesses, seeing them as the beginnings of capitalism that needed to be nipped in the bud. Nyerere, one of the most outspoken opponents of the policy of encouraging the private sector, had argued that giving greater leeway to market forces would lead to greater exploitation and inequality in Tanzania. He had always held that development could


not be equated with economic growth but, rather, ought to occur through the promotion of equality and justice. Only the state, not private interests, could lead development in a way that enhanced equality.

Effects of the Government — Party Rift on Policy Making

Despite the attempts by Tanzania's leaders to portray a unified front to the nation and to the world, their differences had serious consequences for policy making. One of the main effects of the widening gap between the party and the government was the inability to move forward with one unified set of policies. Mixed signals made it difficult for the private sector, foreign companies, and even the informal sector to progress with complete confidence that policies, once adopted, would not be reversed. In 1986 the government started encouraging the private sector, but it kept vacillating as a result of internal conflicts over concrete measures due to party vetoes of various policies adopted. The government had aimed to privatize numerous parastatals that were not making a profit and did, in fact, close some down, but then it balked and did not sell them. In 1988 private investors were permitted to build five breweries, but the decision was later rescinded.[16]

Such reversals in policy as a result of party pressures were commonplace in a number of different areas, leading to considerable unpredictability. For example, Mwinyi, under pressure from the IMF, raised the price for maize flour in March 1987. Soon afterward, Nyerere forced the prices down again.[17] In another instance, the party refused to allow the removal of the National Milling Corporation's (NMC) monopoly of the grain market. The government finally went through with the demonopolization of the NMC, but the party's opposition dragged the process out. Similarly, the party opposed the further relaxation of price controls and further devaluation in 1988, slowing down the implementation of these measures.[18] Thus the party was often able to slow down the pace of reforms.

The competition between the party and the government took an important turn in 1990, when Nyerere introduced the possibility of moving into a multiparty era. He had unsuccessfully tried to stall the introduction of the National Investment (Promotion and Protection) Act, which was passed in February 1990. This effectively reversed a key Arusha Declaration tenet that promoted public-sector investment at the expense of private-sector investment and discouraged foreign investment. The 1990 act offered safeguards against nationalization without compensation, a


package of investment incentives, including customs-duty exemptions, and it established an Investment Promotion Center (Bagachwa 1992b, 210). Nyerere lost his bid to veto the investment code when the code was brought to the CCM Central Committee for approval (Baregu 1993, 111). The so-called pragmatists in control of the government had now clearly gained the upper hand in the party. Nyerere resigned his chairmanship of the party and began to pursue a new strategy to reinvigorate the CCM, to inject greater accountability into the political leadership of the country, and to fight corruption in the government, which had reached unprecedented proportions under Mwinyi. In an unexpected turn of events, Nyerere, who had been considered an ideologue, suddenly became a champion of multipartyism and of greater political reform. Mwinyi and the pragmatists resisted these political reforms initially, and when they finally succumbed to them, they did so reluctantly and in a way that would ensure CCM dominance.

Winners and Losers

Given this intense conflict over the direction of economic reform in Tanzania, the question remains, how did the government come to prevail in its liberalizing endeavors? To answer this question, it is necessary to examine how the government responded to different sectoral interests. In other words, it is important to identify who gained and who lost from various policy measures adopted. By examining these sectoral interests, it becomes clear how the informal economy facilitated many of the measures by taking pressures off the state and allowing people alternative sources of income, especially in the case of labor and civil servants.

Those attempting to preserve the status quo were part of a distinct patronage network that linked the party to state companies. Some were older party leaders who owed their political careers to Nyerere and had strong allegiances to one another, often having gone to secondary school and university together. Known as watoto wa chama waliolewa na chama (children of the party raised by the party), they had become involved together in the early years of CCM's predecessor, the Tanganyika African National Union (TANU). The proponents of economic reform, in contrast, were a disparate group, representing the major cash-crop-producing regions. Located primarily in the government, their power base was their rural constituencies, to whom they were accountable and on whom, in the case of members of parliament, they depended for their votes. Unlike the old guard, many of these leaders had been envoys abroad (Salim had been


Tanzania's ambassador to the United Nations; Diria was ambassador to West Germany), which had not only widened their perspectives but had made it more difficult to establish and maintain patronage links back home. Those from Pemba and Zanzibar were undoubtedly linked to fellow islanders who wanted to expand the historic trade with the Middle East and to encourage foreign investment from Europe and the Middle East in the islands.

Sectoral Interests in Economic Reform

Public-Sector Managers

Public-sector managers and employees were threatened by the elimination of a system in which the government protected their corporations' monopoly status through regulation and subsidies (Bagachwa 1992a, 39). Moreover, the raising of producer prices and the liberalization of internal trade undercut parastatals and government institutions like the NMC. Large parallel-market traders had collaborated with parastatal directors, taking advantage of the shortages to extract high rents. Official pricing and government rationing of foods that evolved to deal with the shortages had the opposite result of pushing even more commodities into the parallel market (Boesen et al. 1986, 27). The complicity between these directors and traders explains in part why their patrons in the party were so anxious to protect the monopoly status of the parastatals and stave off liberalization of internal trade, fearing competition from other quarters. As Tanzanian economist Nguyuru Lipumba (1984, 37) pointed out, "The combination of acute shortages and official controls has given very lucrative money making positions for all those who have the responsibility for distributing the scarce goods. There is usually a partnership between these officials and private businessmen who sell the scarce goods in the black market."

Often the crops would be sold at low, controlled prices to well-connected officials and businessmen with ties to official supply lines. They, in turn, sold the crops on parallel markets at hiked prices. Most urban dwellers had to buy their maize in parallel markets at five to eight times the official price. In fact, when Nyerere abolished food subsidies in 1984, most urban dwellers were already paying exorbitant prices for the maize they purchased in parallel markets. They barely noticed the removal of the subsidies that some had predicted would be accompanied by unrest. Scarcity premiums earned by retailers ranged from 60 to 300 percent. Thus the removal of price controls penalized the black-market traders and


benefited the majority of consumers, because the prices of key open-market goods dropped (Lipumba 1984, 43; Ndulu 1988, 9; Ndulu et al. 1988, 11, 17).

Corruption permeated parastatals, as goods worth millions of shillings also disappeared from warehouses. Coupled with inefficient management, corruption was so extensive that by 1995 the Parastatal Sector Reform Commission admitted that only a few parastatals had been productive and profitable but that most had been "economically inefficiently, incurred heavy financial losses, and took more than their fair share of domestic credit."[19]

Since coming to office Mwinyi, under pressure from donors, had demanded that state corporations reduce the number of employees and increase accountability and efficiency, thus irritating public managers. His administration cut subsidies to the parastatal sector and pushed for privatization schemes by openly describing these as efforts to curb political interference in production. Some parastatals were completely eliminated: the first to go, in 1986, was the large General Agricultural Export Product Corporation (GAPEX). GAPEX had suffered a loss of $3 million through deliberate underpricing and underinvoicing of crops. Later schemes involved joint ventures between the private and public sectors (Tanzania Breweries, Williamson Diamonds, Kisarawe Bricks), outright sales (Tanzania Shoe Company), and the leasing of companies like Tanzania Hotels Investments (TAHI) hotels. In some cases employees and management bought shares in their enterprise while continuing to work for it, as was the case with Tanzania Publishing House. In other cases the buyers were individuals, companies, or institutional investors who bid on a parastatal through what was called a unit trust.[20] But in general, in spite of pressure from donors, divestiture was extremely slow and had almost ground to a halt by 1994, partly as a result of bureaucratic infighting between the Loans and Advances Realization Trust (LART) and the Parastatal Sector Reform Commission (PSRC), both of which were government agencies formed to facilitate privatization.

Private-Sector Manufacturers

Private manufacturers, who accounted for half of all value added in manufacturing in the late 1980s, were ambivalent about the liberalizing measures, which many felt were long overdue.[21] Several policies in the 1990s were aimed at promoting the financing and investment of large-scale manufacturers, including the Investment Promotion and Protection Act (1990),


the Banking and Financial Institutions Act (1991), which was to encourage the growth of private banks, and the Capital Market and Securities Act (1994), aimed at assisting the development of a Tanzanian stock exchange.

In spite of these efforts to improve the business environment, the large-scale manufacturing sector still experienced enormous constraints and believed that the government was dragging its feet in creating conditions that would promote private-sector investment. In the mid-1990s investors complained about the inefficiency of the government agency, the Investment Promotion Center, that was to process investment proposals. Other obstacles included limited sources of local capital and an inefficient banking system. Local industries suffered from the corporate tax system, which levied taxes across the board with no differentiation made on the basis of firm size, level of capital, or technological basis. Moreover, unpredictable changes in tax and exchange rates made planning on a yearly basis difficult. Tanzanian manufacturers continued to contend with a weak infrastructure (an unreliable supply of electricity, inefficient telecommunications, and poor roads, railways, and air transport). Legal institutions remained weak, and the process of obtaining title deeds, business licenses, company registrations, industrial licenses, and other necessary legal documents to conduct business were cumbersome. According to Iddi Simba, chairman of the Confederation of Tanzanian Industries (CTI), these legal-documentation-clearance processes had been created "in order to satisfy a myriad of rules most of which are arguably less safeguard measures than corruption pit-stops."[22]

Because industry was operating at such low capacity (20–30 percent), production costs (per unit) were high, making locally produced commodities even less competitive. Moreover, the taxation system discriminated against local industrialists because of the high sales tax and customs duty on imported raw materials and inputs needed by local industries. This made imported goods more attractive to buyers.

The policy of trade liberalization was also controversial. It had been especially harmful in the areas of textile production, which suffered from the importation of cheap secondhand clothes and better-quality material, with which local industries could not always compete. In fact, the private-sector and the public-sector manufacturers of textiles joined to form a lobby to press for greater restrictions on importation and for greater controls over abuses of the trade guidelines.

Although trade liberalization put particular pressures on the manufacturing sector, the general atmosphere of encouraging private-sector activity, in sharp contrast to the pre-1986 period, helped give rise to a fledgling


African business sector, as seen in the emergence of African-owned companies like Industrial Projects Promotion, Ltd. (better known by its acronym, IPP). In addition, in the mid-1980s women for the first time began to set up private flour mills, textile factories, bakeries, and other such small industries. By 1990 a group of middle-class and big businesswomen had formed a national Association of Businesswomen in Tanzania to assist in dealing with some of the problems women faced going into business, such as lack of capital and neglect by financial institutions. Because it was no longer possible to make a decent living in government service, many highly educated younger Tanzanians were opting to go into the private sector. Others who had retired from civil service, knowing their pensions were insufficient, used their savings or took out mortgages on their houses and went into business.

Private-Sector Importers and Exporters

Guests at a dinner given in Nyerere's honor in October 1986 by the predominantly Asian Dar es Salaam Merchant's Chamber congratulated Nyerere for permitting the return to Tanzania of foreign-held funds as part of the country's liberalization policy. To their dismay, Nyerere responded that he did not like the practice and reminded them that it was only a temporary measure.[23] Until 1984 the government had controlled all imports. In 1984, with the introduction of an own-funded import scheme, importers were allowed to use their own foreign exchange (no questions asked about how they obtained it) to import commodities. The scheme was enormously popular among importers, and by 1989 own-funded imports accounted for at least one-third of all imports. In 1988 the government began to make foreign exchange available to private traders for selected high-priority import categories (such as spare parts, raw materials, intermediate goods, drugs, and pharmaceuticals), through an Open License System (OLS). Both policies served to relax trade restrictions, thus discouraging the evasion of official channels that had been commonplace.

Importers and exporters alike benefited from trade liberalization and the export retention scheme, which allowed exporters to keep a portion of their foreign-exchange earnings in the country and a portion abroad. The fastest-growing sector of exports was the nontraditional category (birds, spices, flowers, and seafoods, for example).

Not all traders benefited from liberalization through legal means, however. Importers frequently skirted customs regulations with the complicity of customs officials, bringing in unapproved commodities in containers with false labels. Government officials had been known to cover for traders


who brought in goods like paint, condensed milk, or even medicines that had passed their expiration date. Such goods were obtained abroad at little or no cost and sold in Tanzania at exorbitantly high prices. Traders who wanted to conduct an honest business found that not only did they face fierce competition from those resorting to illegal practices, they also had to operate within prohibitive government restrictions on trade.

Although exporters found the export-retention scheme beneficial compared with past policies, many still felt it was too restrictive. The money kept in Tanzania was controlled by the Board of Trade (BoT) and could not be used without board approval. They found it difficult to gain access to their foreign-exchange earnings. One way they worked around these restrictions, according to one exporter of spices, cocoa, seafoods, and vegetables, was by underreporting their foreign-exchange earnings. But, the exporter quickly added: "This is an indirect form of smuggling and if you get caught at my age you are in trouble. If I spoil my name today I spoil the name of my children."[24]

Race and the Changing Business Community

Because such a large section of Tanzania's larger businesspeople are of Asian descent, the gains made by import-export traders, wholesalers, and retailers after the 1984 liberalization brought to the surface old hostilities that had been suppressed with various measures adopted after the 1967 Arusha Declaration. The Asian community had always been well represented among the large plantation and estate owners, large wholesalers and produce merchants, professionals, highly paid civil servants, managers, and executives, as well as among the self-employed in areas like retailing, tailoring, shoemaking, and carpentry. Areas like wholesale and retail trade had been dominated by Asians and Arabs since colonial times. In 1960–1961, for example, not a single wholesale license was issued to an African, and only 12 percent of the retail licenses were in the hands of Africans (Sporrek 1985, 100).

Many of the measures that followed the Arusha Declaration, though not adopted with an overt intent to target a specific racial group, certainly had this effect. Even prior to the Arusha Declaration, Africanization of the civil service had occurred, affecting British and Asian professional civil servants, most of whom emigrated because they did not intend to take Tanzanian citizenship. The establishment of the wholesale Cooperative Supply Association of Tanganyika in 1962 was also an attempt to curtail the position of Asian wholesalers (Shivji 1976, 69–74). The Arusha Declaration represented an attempt to exert state control not only over banks


and private manufacturers but also over the export-import trade, wholesale trade, and light industries, in which large numbers of Asians were represented. The declaration affected primarily the upper classes of the Asian community, who, instead of saving, accumulating, and investing capital, began instead to export it. The process of Africanization continued with the 1971 nationalization of houses in urban areas, which had a large impact on the Asian community, particularly Asian shop owners. Similarly, a short-lived 1976 campaign to put all shops under government control, Operation Maduka, also had its heaviest impact on Asian and Arab shop owners, because at the time only about 30 percent of Dar es Salaam's shops were owned by Africans (Sporrek 1985, 101).

With the reversal of so many of the older policies that had had the effect of Africanizing economic activity in Tanzania, new tensions began to manifest themselves between a small but growing group of African and Asian business people involved in manufacturing and trade. African business people and others were openly challenging the loyalties of the Asian business community in what was referred to as the indigenization debate. Joining in the attacks on Asian business people were not only religious extremists like Rev. Mtikila, but also church leaders and political leaders like Augustine Mrema, leader of the opposition NCCR-Mageuzi party and one-time CCM leader. Some of the attacks were so inflammatory that President Mwinyi was forced to intervene at various junctures, threatening to deal ruthlessly with people who extended business rivalries into "racial or tribal tensions."[25]

Many of the new African manufacturers whom I interviewed and who had emerged since the mid-1980s said they might have gone into the private sector much earlier had it not been for the political and economic environment that discouraged such activities. They believe that the Arusha Declaration delayed the emergence of an African private sector. After the declaration Asian business people continued to predominate in the private sector and found ways to work around the restrictions, linking up with the necessary "godfather" patrons within the government and the party to protect them and help them through the bureaucratic red tape. With the more encouraging atmosphere for the private sector after the mid-1980s, greater numbers of African business people also became involved. As one African director of a company said, "The Government failed to allow us to invest. There was overcontrol, most people could not do things…. Liberalization gave us greater confidence."[26]

In interviews with me, African directors of various private companies appeared to feel disadvantaged compared with their Asian counterparts,


who owned the majority of private companies in Tanzania. Likewise, most of private-capital-stock formation was in the hands of Asians, some of whom owned family businesses that had been in existence for a hundred years. One of the largest, Karimjee Jivanjee, Ltd., had been established in 1895. Even the Asian-dominated Dar es Salaam Chamber of Merchants, with 4,000 members, was the more powerful body compared with the primarily African Dar es Salaam Chamber of Commerce, which had a membership of only 150 in 1988. Moreover, foreign companies were more likely to deal with Asians, who had been established for a long time in business, when given a choice between an African-owned company and an Asian-owned company with similar products or commodities for sale.

These differences created distrust between the African and Asian business communities. As one former director of a large multinational corporation said to me: "There was never complete trust on both sides. Partnerships between Africans and Asians were necessary for Africans to get started in business. Africans needed them for capital and they needed Africans for the 'science of who you know'—your contacts."[27]

Historically, the main problem keeping Africans out of business has been lack of access to capital. As in the case of the manufacturing sector, the biggest change for importers and exporters was the increased role of new African traders, who were especially involved in the export of nontraditional goods. One of the largest exporters in Tanzania believed that the African export sector was "competing very well with the Indians" because Africans had begun to find niches in this nontraditional export category, which proportionately fewer Asian exporters had entered.[28] Part of this trade had previously been carried out illegally but was legalized with the export retention scheme. African exporters whom I interviewed said that they could use their extended family and other networks to find the best prices. They believed that it was easier for them than for Asians to convince local farmers and fishermen to sell to them and give them better prices.

Women also entered the trade sector in the mid-1980s on a scale not seen earlier in the decade. They were involved in such businesses as importing chicks from Zambia, exporting prawns to Botswana, and exporting Makonde carvings and other crafts to the West.

Agricultural Producers

Agricultural producers theoretically had the most to gain from the policies of devaluation, increasing producer prices, and lifting restrictions on internal trade. Indeed, production of crops like coffee, tea, cashew nuts, tobacco, and sisal grew at a rate Of 4 percent from 1986 to 1989. The production of


cotton more than doubled between 1986 and 1989, and similar patterns were evident with other crops. Similarly, production of domestic crops like maize and rice increased with the liberalization of internal trade, in which cooperative unions and primary societies were free to sell crops to anyone and restrictions on internal movement of crops were lifted. Overall, the agricultural sector registered an average annual growth rate of 5 percent between 1986 and 1991, compared with an average annual growth rate of less than 3 percent from 1981 to 1985.

Some of these changes can be attributed to changes in pricing policy, but others argue that improved weather conditions after 1984 and the incentives provided by the new availability of consumer goods may have played a larger role in facilitating increases in agricultural output. A careful disaggregation of the beneficiaries of adjustment policies shows that agricultural producers experienced only a 30 percent increase in terms of trade in 1985, while the marketing boards and cooperative unions experienced a 100 percent improvement in terms of trade. One of the reasons for this was the inability of the prices to keep up with changes in the exchange rate. Similarly, although inputs became more accessible, it was primarily middle and large farmers who benefited from these policies at the expense of smallholders (Havnevik 1993, 298, 304–5, 307). Other studies yield more ambiguous findings. Some argue that rural incomes have increased substantially since reform policies were implemented: Luisa Ferreira and Lucy Goodhart note a 14.6 percent increase in rural income between 1983 and 1991. However, others have pointed out that some of this increase in rural incomes can be explained by poor accounting of rural producers' nonagricultural sources of income (wood sales, fishing, crafts, and so forth) in the prereform period (Ferreira and Goodhart 1995, 7; Havnevik 1993, 311–12).

Urban Workers and Self-Employed Workers

Why the trade and agricultural sectors supported many aspects of the government's reform policies is clear. The real puzzle was the reaction of urban dwellers, the group that had the most to lose from austerity measures and from devaluation.

In 1986 a delegation of the Trade Union of Tanzanian Workers (JUWATA) went to the president to thank him for a fair budget after he had launched the Economic Recovery Program, which included various austerity measures.[29] On another occasion, JUWATA Secretary General Joseph Rwegasira had announced that his organization supported the agreement with the IMF because if the present economic situation continued,


the nation's political, ideological, and social life would be threatened. The government's rejection of the wage freeze the IMF was proposing helped make the IMF agreement palatable to JUWATA. The organization expressed concern, however, over the rate of devaluation and the raising of interest rates.[30]

In 1991, when JUWATA became independent of the party and was renamed the Organization of Tanzania Trade Unions (OTTU), the newly constituted umbrella body became slightly more aggressive in its defense of workers' rights. Unlike JUWATA, OTTU rejected the argument that the civil service had been cut for efficiency. OTTU argued that the wage bill claimed only a small percentage of public expenditure, most of it going to vehicle maintenance. It rejected a proposal to treat fringe benefits given to workers as part of the salary to be taxed. In spite of its more critical stance toward the government regarding economic reform, OTTU met with opposition from other labor unions, which felt that it had not severed itself sufficiently from the legacy of being a party association. The Tanzania Professional Teachers' Association (CHAKIWATA), formed in 1985 with a nationwide membership Of 56,982, became independent of OTTU in June 1992, in spite of protests from OTTU that this was illegal and that CHAKIWATA was not complying with the laws of the land. CHAKIWATA leaders said that by becoming independent, their trade union would be in better position to develop teachers professionally and to fight for improved working conditions.[31]

But apart from these few murmurings and splits within the worker's movement over OTTU's reluctance to vigorously fight for the interests of workers, labor's lack of response seemed incongruous. After all, workers and civil servants continued to suffer from severe drops in real wages throughout the 1980s; workers faced plant closings due to industry's low levels of operating capacity; and major layoffs of civil servants occurred in 1985 and 1992. In other words, the austerity measures hit urban dwellers harder than any other sector of society. The lack of riots, demonstrations, and other forms of opposition to the measures suggests a certain level of acquiescence to the new direction that had been adopted. For example, virtually no critical letters to the editor appeared, although a few supported liberalization. Nevertheless, there were few open signs of support for the reform measures and certainly no open support for the IMF agreement.

Some have suggested that the absence of public debate about the issues may have been engendered by the authorities themselves for fear of creating opposition to these measures (Kiondo 1992, 35–36). There is no question that the public was not informed about many of the economic reforms


that had been adopted. However, when in my 1987–1988 survey I asked workers and self-employed people about how their lives had changed over the past five years, from the previous administration to Mwinyi's administration (which marked the beginning of the more far-reaching economic reforms), only 22 percent responded that they were worse off, whereas 44 percent said that their own financial situation was the same and 34 percent said that it was better. Those who said that their financial situation was better attributed the improvement to their own involvement in income-generating projects. Another survey, of 866 urban workers, rural households, traders, and transporters cited by Maliyamkono and Bagachwa, revealed similar results: 92 percent of urban dwellers of all occupational levels indicated support for economic liberalization (1990, 117). Surprisingly, they found that only 60 percent of rural agricultural workers supported economic liberalization, even though they had potentially the most to gain by it.

This anomalous situation of city dwellers can be accounted for in a number of ways. To begin with, people were busy surviving and making ends meet in their informal occupations, leaving little energy for mobilization around such issues. Second, as is evident in the challenges from the teachers' union, the trade-union movement, which was the only organized structure capable of mounting significant opposition to the measures, was too weak to do so. Moreover, decades of interference by the party had weakened its capacity for independent leadership, even as the movement was granted autonomy from the party. Third, although public and private manufacturers were hurt by trade liberalization because they had difficulty competing with cheaper, imported products, the informal economy ironically benefited considerably from the new availability of nets for fishermen, cloth and sewing notions for tailors, and tools for carpenters, in spite of the high cost of these products. The alternative, as they had experienced in the years prior to trade liberalization, was the complete unavailability of these inputs. Moreover, the fact that there were goods on the shelves gave added impetus to people to find ways of earning extra income.

People I interviewed who were laid off because of cutbacks in industry and the civil service, though unhappy about forfeiting this extra source of income, simply continued full-time with their informal businesses or found one if they did not have one already. Monthly salaries were frequently seen as hedges against the unpredictability of informal businesses but ultimately supplemented the larger income obtained from businesses. Had formal jobs been the primary sources of livelihood, the response of labor and civil servants would probably not have been quite so complacent.


To place the issue in sharper focus, it should be noted that by the mid-1980s many people were leaving their formal jobs of their own accord to become self-employed because they simply could not make ends meet through formal employment.

Expectations of the government regarding employment were quite low by the mid-1980s. This was evident from workers' responses to our survey question (roughly translated from Swahili), "What should your monthly salary be in order for you to get by?" Invariably, the initial response was an amount only slightly higher than what they were already making and far below their stated daily food expenditure. So ludicrous was this question that interviewees balked when pressed further on this issue. Even the second answer was considerably below their stated daily expenses. For instance, one messenger and his wife supported a household of ten on about TSh 20,000 ($200 at 1988 exchange rates) a month, which they obtained mostly from a restaurant operated by the wife. Initially the husband responded that "2,260 shillings [$22.60] would be a good sum" for his monthly wage. When asked why, he answered: "The government would never give me more."[32]

Although it may appear from these observations that labor and civil servants did not oppose the authorities, such an assessment is not entirely correct. Opposition was, in fact, fierce, but it was mounted, as I show in chapter 6, against policies that encroached on people's ability to pursue income-generating activities outside their formal jobs. Their resistance contributed to the greater legitimization and legalization of informal-sector activity and created a better environment for the pursuit of such small-scale private enterprises.

Lack of resistance to economic reforms on the part of labor and civil servants was also a consequence of a series of other government policies and nonpolicies (turning a blind eye to various activities) to accommodate these sectors. However slow and imperfect, these measures were an indication of the beginnings of some long overdue readjustments in state-society relations that would make the state more responsive to societal needs and preferences. Where fundamental shifts in policy were not possible without relinquishing the ideological principles on which the state had based its claims to legitimacy, tacit compromises were often worked out. In these instances, the parameters of societal action and initiative were drawn much more broadly than official policy allowed. People perceived the quiet and not-so-quiet acquiescence of the leadership, or various sections of the leadership, as an attempt to come to terms with hardships brought on by the crisis.


This kind of silent negotiation between state and society could be considered part of a process of governance as formulated by Goran Hyden (1989), in which he stresses the role of individuals in overcoming the inertia of institutional and systemic structures through their own initiatives. Individuals or collectives, he argues, can bring about changes that move toward greater legitimacy, new reciprocities, trust, and accountability between state and society.


By the mid-1980s two contending coalitions had emerged, one coalescing around the government and the other around the CCM. The split was manifest in the widely diverging composition of the Cabinet (proreform) and the party Central Committee (antireform). In the struggle that ensued, after two decades of trying to assert its centrality in Tanzania's political life, the party began to relinquish considerable control to the government by the end of the 1980s and to take steps toward a multiparty system that would effectively undermine its own monopoly of control. Proreformers were backed by sections of the private sector, importers and exporters, while the CCM, which was trying to slow down the pace of reform, gained support from those tied into patronage systems that were dependent on government monopoly of the economy and CCM monopoly of the political system.

Some of the reforms opened old wounds and created new conflicts between an incipient African entrepreneurial class and the more established Asian business community. At the same time, new possibilities for legal business activities heightened tensions between the entrepreneurs operating outside the illegal patronage networks tied to the government, on the one hand, and those who were using their government positions to enrich themselves or their connections with the government to give them market advantage, on the other hand.

Finally, the lack of opposition from labor, the one group that one would have expected to oppose the measures, was a consequence of years of CCM control, which had weakened its independence even as the party withdrew its formal links with the movement. Moreover, workers were simply too preoccupied with survival through informal means to protest. They believed that the government would have little to offer them in the way of higher wages and saw any move to make such demands as pointless. They reasoned that the only way to survive was through their own endeavors; hence their involvement in the informal economy and the absence of greater demands on the state.


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