Foreign Aid and Economic Growth in Tanzania

Abstract

Official development assistance (ODA) more usually known as foreign aid contains capitals transfers from the public sector in the method of external grants and credits at concessional monetary terms to developing countries like Tanzania. Moreover, many studies have conducted in the empirical literature on the effectiveness of foreign aid have tried to evaluate if foreign aid influences its primary purposes well-defined as the stimulus of economic expansion and well-being of developing countries Moreira (2005). Most of the developing countries in the world observed as being poor not only because they do not have enough resources, but also the majority of their internal revenue are being channeled to meet consumption wants of their citizen with the little left for savings. These little savings cause small investments rate resulting into low growth rate in the county, this resulting in brings about poverty. The poverty at beginning through low savings, low investments and low growth makes the developing country like Tanzania left with no choice other than to seek for external resources such as obtaining foreign aid and foreign borrowing to bridge the saving-investments gap with the aiming to accomplish economic growth and poverty lessening in Tanzania. In current years, more calls have made for more foreign aids to developing countries as to reduce poverty as well as to shelter deficit in the annual budget. More developed countries, international organization and other emerging partners (sponsors) have all been improved appeals for a massive infusion of growth of foreign aid to DCs involving Tanzania as well. Foreign aid is viewed as promotion tool when injecting to developing countries, in turn, foreign aid will material benefit the people of recipient country Okon (2012). Low-level of income considers Tanzania like any other of developing country, low level of industrial capacity utilization as well less of small-scale. To solve these economic problems, Tanzania required foreign aid as a reliable and proper option for improving the saving-investment gap. The question if ODA augments economic development in aid-recipient countries yet continues greatly debated. No arrangement established between scholars and policy makers (Veiderpass and Andersson, 2007). In the aid-growth literature, many of empirical studies on the effect of foreign aid on economic growth resulted in mixed outcomes (Hokmeng and Moolio, 2015). Tanzania has benefitted from ODA after independence from various donors and others developing partners. Very recently, Tanzania has received more foreign aid from the developed countries such as China, India, and Morocco and other European countries. As known that majority of Africa countries continue to receive more ODA from donors and other developing partners, in recent years, Tanzania becomes the largest country received foreign aid in East Africa region. Regardless of receiving the significant amount of funding, many developing countries have remained stagnant and become more aid-dependent. This grim reality cause's debate on the effectiveness of aid, foreign aid can be into grant or Assistance and loan assistance (Javid and Qayyum , 2011). Foreign aid inflows which are in the form of ODA plays a significant part as a supplement to private financing for economic expansion in the Tanzania's economic. In addition to that, the Foreign aid is very critical in improving the business atmosphere for the private sector and accelerating economic development and expansion. Harold (1939), Domar (1946) claimed out that the rate of economic growth in an economy relies on the level of savings and the capital output ratio. The significant of foreign aid is very vital because Least Developing Countries (LDCs) constrained with the savings and money. Hence, foreign aid provides the LDCs with capital investments. Foreign aid is gradually a promoter for transformation, and it is enabling to formulate circumstances in which LDCs can increase their revenues. The previous half-decade years have seen substantial achievements, as well as disasters, in development assistance. Better policies in developing countries, collectively with improved allocation of foreign aid since the end of the Cold War, entail that the help is more successful today at reducing poverty than ever before. The currently empirical studies show the effect of aid on development drawn approximately related ends, in the long run, has positive and statically significant effect (Minoiu and Reddy, 2010; Juselius et al., Clemens et al., 2012). In their studies concluded foreign aid has a negative influence due to political instability and decline in government quality implications in the country. Similarly, others prominent researchers (e.g.,Booth, 2011) deliberate the hypothesis that foreign aid grows weaker due the quality of political institution to be pertinent, so may undermine motivations to undertake collective action problems that constitute economic development barriers. Nonetheless, other researchers (Djankov et al, 2008) both found that adverse effect of foreign aid on economic expansion directly measured of the responsiveness of corruption control as well as political consensus. Abiola (2008) claimed that Foreign aid is a very significant tool for supporting education, public infrastructure growth, health, agriculture and rural growth, food security, etc. Foreign aid is very vital due to its implications for poverty lessening in developing countries; their role in the development practice of developing countries, but has been active debate on-going among the economists, and they generate mixed results. The influence of foreign aid to their GDP is to such an extent that the countries would be in the difficult situation or even failure whether the foreign the aid to discontinue (Chung-yee at al., 2012), Bakare (2011) also advocated that ODA is a means of accumulating the capital obtainable for the investment and economic development required to diminish poverty and raise the standard of living in SSA. Moreover, he contended that ODA could also give resources for industrialization, improve the efficiency of resources use, increase product diversity and generate more employment. The capability of developing country like Tanzania to appeal foreign aid can maximize the related merits and lessen the risks which are a function of the conditionality of the ODA. The study investigated by McGillivray et. Al., (2006) advocated that there are main four different views on the usefulness of the ODA have been recommended such as foreign aid has decreasing returns, foreign aid subjected to the external and climatic circumstances, foreign aid is affected by political conditions, and FA rely on institutional quality. In the case of Tanzania, according to the budget statement (2014), in year 2013/14 was received foreign aid of TZS 734 billion which is 63 percent of the annual estimate. As the GBS TZS 368.6 grant for Basket Funds which is equivalent to 74 percent of annual estimates, in addition to that amounting to TZS 1,200 billion for the development project which is equal to 55 percent of annual estimates amounting to TZS 1,200 billion for development project which is equivalent to 55 percent of annual estimates. During the financial year, 2014 Tanzania has received the grant for Government Budget of amounting shilling 2,941.6 billion, out of this amount shilling 922.2 billion proved in the form of General Budget Support; TZS 1,745.3 billion through grants and special consideration loans for development project and shillings 274.1 billion for basket fund. Likewise, Gross Domestic Product shows a significant slight increase from 6.4 percent in the year 2011, in 2012 the growth rate was 6.9 percent and grew by 7.0 per cent in the year 2013, these more likely show a good indicator appreciably compared economic development in the Sub-Saharan country. According to the International Money Fund (IMF) (2014), Tanzania was ranked in 8th commercial growing rather than another country in Sub-Saharan and takes the first position in East Africa. Foreign aid associated with ODA and frequently directed to the poorest countries (World Bank, 1998). Despite developing countries receiving massive amounts of monetary support from donors and other Developing partners, Tanzania Isles (Tanzania) is among of poor Sub-Sahara countries that have remained stagnant and became too much dependence on foreign aid. Foreign aid's deviations delay and cutting are the very chronic problem in Tanzania as well as in another part of Sub-Sahara African countries (OCED 2005). This study will examine how the declining of foreign aid in Tanzania affect Tanzania’s Economic development due to Donors and other Developing partners cutting their financial funding to Tanzania. The research will also find out to what extent the decline in donors’ support affects Tanzania plans. The research further will investigate the reasons why do donors and other developing partners cut their foreign aid to Tanzania. This reaction of Donors and other Developing partners cutting their funding affects a flow of funds and thus and stalling plan's implementation. This study s some possible policies to be applied by Tanzania government in reducing too much dependence on Foreign aid. The research will also come out with strategies or recommendations to explain the problem of too much dependence on donors and other developing partners. The strategy to be achieved if the Tanzania government make changes to its reforms and policies, improve revenue collection through mobilization of internal revenue that can mostly allocate the development plans, reduction of recurrent government expenditure in seminars, attending workshops which take place inside and outside the country, medical expenses and education expenses abroad by utilizing local facilities. Moreover, family planning can seriously control which is remarkably increasing from population growth, maintaining accountability and good governance policies, controlling-corrupt practice. Hence commercial projects will not be successful if the country has poor governance. It requires the obtainability of enough revenue to finance most government projects. Therefore, the ends result of this study will enable Tanzania to use its identifiable capitals to implement its plans without dependency from donors and another developing partners’ support. The donors provide various funding in the several sectors such as education, health, population capacity building and skills, children's education, Food Security and Nutrition baseline study, support election process and malaria campaign, Tanzania rural roads, Education support to primary education in Tanzania, HIV/AIDS programs and AIDS control, Management of data system, promoting press freedom, review of education sector, policies and plans, Disaster risk management, Capacity building for trade development and integration in Tanzania, developing national framework for economic development, support to development for Tanzania strategy for financial inclusion, Support to Tanzania budget (GBS), Tanzania energy sector program, political development and political tolerance programs, poverty monitoring master plan, management supervision of natural resources, establishment of agro-processing centers, urban and rural water supply development projects, local government support, Tanzania sanitation and drainage program, sustainable management of land and environment, Capacity building for sustainable running water management and cost recovery in Tanzania, Support to Policing of Gender Based Violence in Tanzania, improving gender-sensitive data collection and analysis in Tanzania and etc. The Foreign aid display a dynamic role in the economic growth of a recipient country (Tanzania) both regarding social and economic development perspective. Most Sub-Sahara African countries depend too much on Foreign aid from Donors and other Developing Partners to support their annual budget to cover deficit arising from a low level of domestic savings. This paper examines the Tanzania's experience with the ODA and explores the effect of foreign aid on economic growth.