A Is the ‘Bangladesh Paradox’ Sustainable?

The Bangladesh paradox consists of the apparent contradiction between the superior growth performance of the country over the last two or three decades and the dismal state of its institutions, at least as gauged by most international governance indicators. The IDP case study on Bangladesh attempts to explain this paradox and address the issue of its sustainability.

What follows is a short summary of this case study conducted according to the methodology described in Chapter 2. It starts with a brief presentation of the geographical, demographic, and historical context of development in Bangladesh, before focusing on its economic achievements but also on its challenges going forward. Institutional issues are then taken up, before presenting a full institutional diagnostic of Bangladesh’s development perspectives and then concluding.

B The Geophysical and Population Context

Occupying the delta plains of major South Asian rivers – the Ganges, the Brahmaputra, and the Meghna – Bangladesh covers a 150,000-square-kilometre tract of land surrounded by India, except for a short border with Myanmar in its southeast. With 165 million inhabitants, it is the most densely populated country in the word (excluding city-states like Hong Kong and Monaco). It has a tropical monsoon climate with heavy seasonal rainfall, hot temperatures, and high humidity. The combination of its climate, its dense river network, the low elevation of most of its land above sea level, and its geographical position at the very back of the Bay of Bengal make it prone to frequent natural disasters, including floods, cyclones, and tidal surges. For the same reason, it is one of the countries that is most threatened by climate change.

These natural conditions affect the country’s development potential and some of its development features. The scarcity of land is especially important since it affects agricultural production and constrains the extension of cities and non-agricultural activity. Over time, arable land as a proportion of total land has shrunk, the average farm size has fallen – it is today around 0.6 hectares – and landlessness has increased in rural areas. Meanwhile, urbanisation has progressed rapidly – at an annual rate of almost 1 per cent of the population – so that the competition between agriculture and other activities for land is fierce.

Land scarcity would be even more worrisome if the rate of population growth had not fallen in a rather spectacular way over time. The fertility rate was above six children per woman at the time of independence in 1971. It is now close to two. Consequently, the annual population growth rate has declined from 3 per cent to less than 1 per cent. Ethnically, the population is extremely homogeneous: 98 per cent of the population belong to the Bengali ethnic-linguistic group, while the remainder comprise several tribal groups in the hilly parts of the country. The same homogeneity is observed with regard to religion, with more than 90 per cent Muslims and 8 per cent Hindus.

This religious homogeneity, as compared to Bangladesh’s neighbour India, is mostly due to the historical origins of the country as the isolated eastern part of Pakistan, itself the result of the partition of the Indian provinces of Punjab and Bengal along religious lines at the time of India’s and Pakistan’s independence in 1947. Today’s Popular Republic of Bangladesh thus results from a sequential process of independence: from India or the United Kingdom at the time of the partition, and from West Pakistan twenty-four years later, after a short but deadly war in which dissident Bengali forces defeated local West Pakistani forces thanks to the support and very effective involvement of the Indian army.

C A Short Political History of Bangladesh

Independence was proclaimed on 16 December 1971. Since then, however, the political history of Bangladesh has been rather turbulent, at least until a little more than ten years ago. As it had a clear impact on development, and on the evolution of institutions in Bangladesh, it is worth briefly listing the main episodes in that history, and the enduring struggle between the two main political parties, the Awami League (AL) and the Bangladesh National Party (BNP).Footnote ¹

D Sources of, and Challenges to, Economic Growth

Bangladesh’s experience in regard to economic growth and development over the five decades since independence has generated much interest among academics and development practitioners, both at home and abroad. From its war-torn economy of 1972 until now, Bangladesh has been able to increase its per capita GDP in real terms 3.7 times (from US$460 in 1972 to US$1,700 in 2018),Footnote ³ cut the poverty rate from as much as 71 per cent to 20.5 per cent over the same period, become the second largest exporter of RMG in the world, and registered some notable progress in social sectors. In 2015, it graduated from the World Bank’s low-income category to lower-middle-income country category. Also, Bangladesh is now on track to meet the criteria for graduating from least developed country (LDC) status by 2024. At the same time, however, Bangladesh’s development has happened in a widely recognised context of weak institutions. It has always been ranked in the very bottom of most international rankings of governance indicators. As was just seen, up to the late 2000s, its political climate was extremely tense, unstable, and often violent. All of these factors have prompted some analysts to term Bangladesh’s economic development success as the ‘Bangladesh paradox’ or the ‘Bangladesh surprise’.Footnote ⁴ The rest of this short summary of the IDP Bangladesh case study is devoted to explaining this paradox and, most importantly, to assessing whether it can be sustained: namely, whether growth can continue at the same speed without a major change in the institutional setting.

E Social and Institutional Challenges of Bangladesh’s Development

Bangladesh’s undeniable success in terms of economic growth and structural transformation, particularly over the last two decades, hides not only some fragility but also deep weaknesses, which may develop into a true handicap in the future. As is well-known, Bangladesh ranks near the bottom of most international governance scales, be it in terms of the control of corruption, state capacity, or the rule of the law. In-depth analysis of several sectors, as conducted in the IDP case study of Bangladesh, makes it possible to document more precisely the flaws in the management of the economy that lie behind this dismal ranking. Such flaws can be observed in most sectors, from infrastructure, to tax collection, to the disastrous regulation of the banking sector, to the judiciary, and to the state bureaucracy, as exemplified in the educational sector. It is fair to say that some progress is being made in some domains, in particular in the provision of energy and the electrification of rural areas, and in school enrolment. It is also the case that, in social matters, an extremely dynamic NGO sector, some parts of which have a worldwide reputation, like Grameen Bank and BRAC, is partly remedying the weaknesses of the government’s management, especially in the fields of health, education, and the fight against poverty in general. Yet huge progress is still to be accomplished, as can be seen from the few examples briefly summarised below.

Little will be possible, in fact, if public resources remain as limited as they are today. With total tax receipts below 9 per cent of GDP (among the lowest in the world) and limited non-tax public revenues, Bangladesh’s public sector suffers from severe atrophy and has a restricted capacity to provide the public goods and services that are needed to extend the industrialisation process beyond RMG exports and to cover basic social needs in the areas of education and healthcare.

On several occasions, the present government has explicitly mentioned the need to raise taxation. Analysis shows that a large part of the problem comes more from tax collection than from too low tax rates or too narrow a definition of taxable assets. No reform has been implemented so far. An ambitious reform of VAT collection was proposed a few years ago but was cancelled at the last moment. The blockage seems to come from an implicit coalition between tax personnel and politically powerful taxpayers, which successfully prevents the introduction of automated procedures that would improve asset transparency, both for direct and indirect tax, and therefore tax collection. The consequence of this situation is not only a dearth of public services, but the informalisation of the economy, since a majority of small and medium firms are able to evade taxation.

The banking sector is another area where corruption is a source of inefficiency. Bangladesh is at a stage where this sector, which was initially completely state-owned, has been substantially privatised, with several new banks recently licensed. Yet some important banks and financial institutions remain in the hands of the state, leading to a dual structure of the whole sector. If, overall, the sector has been, and still is, effective in supporting the development of the RMG and other sectors, most often through exclusive deals made between powerful entrepreneurs and private banks, it also shows major weaknesses and exhibits serious failures of regulation, most notably apparent in recurrent excessive non-perfoming loans (NPL). Often caused by fraudulent behaviour rather than problems of profitability, NPLs exert adverse effects on the efficiency of the economy, reinforce the culture of corruption in the country, and contribute to rising inequality. Several major scandals have occurred, showing how deep corruption may be entrenched in this sector, despite, paradoxically, its capacity to finance the dynamic part of the economy.

A major institutional weakness of the banking sector is the lack of autonomy of the central bank in regard to regulating the sector, because of the clear subordinate position of the governor with respect to the government, and, through political links, private bankers. In this respect, the Bangladesh Association of (private sector) Banks, and the increasing political support it can command, represents a major obstacle to effective regulation.

Primary schooling may serve as a good illustration of the issues that are typical of the delivery of public services in Bangladesh: positive efforts are made but their results fall short of what is expected. In primary education, the government boasts an impressive record in regard to increasing enrolment and achieving gender parity. But this is tempered by the growing body of evidence showing that learning outcomes for many children are extremely poor. The main systemic challenges in this sector can be categorised as follows: (i) a complex coexistence of various actors faced with confusing and sometimes conflicting divisions of responsibility; (ii) a lack of resources – Bangladesh devotes only 0.8 per cent of its GDP to primary education, infrastructure is poor, and teachers’ salaries are abnormally low, being slightly under per capita GDP; and (iii) in regard to teacher recruitment and management, recruitment is flawed, with corruption problems including political influence and bribing, while the monitoring of teachers (absenteeism or performance) is weak.

Although the problems in Bangladesh’s education system, and indeed in its public services more generally, are both severe and deep-rooted, there are various reforms which could and should be undertaken but which have been set aside. The historically low budgetary allocation towards primary education suggests that an increase in resources to the sector ought to be a major political priority, even though it will not solve all the problems.

Land markets raise important institutional issues in many developing countries but especially so in Bangladesh, as land is so scarce, and the population is so large. The way they function in Bangladesh leads to two major difficulties: an inequitable and not necessarily more effective distribution of land, and constrained industrial development. The growing inequality in the distribution of land results from arrangements that involve corruption, nepotism, and the interference of business elites acting through political parties, rather than neutral market operations. Consequently, the land administration has not only been captured by elites but has also become resistant to reform or effective regulation, and the more the system works in their favour the greater their resistance to reform. The same analysis applies to Bangladesh’s attempt to use Special Economic Zones (SEZs) to attract industrial investors despite the scarcity of land. The institutional mechanisms for acquisition and compensation are subject to a range of corrupt practices, which in turn create vested interests that resist change and a bias towards politically connected purchasers, or towards those who are willing and able to pay bribes. Such an environment is inimical to a good business climate and undermines the potential industrial incentives provided by the SEZs.

Another consequence of the way land reallocation operates is the dispossession of some landowners, who then become pure land tenants. Landlessness has greatly increased in rural areas, with the proportion of pure tenants surging from 45 per cent to 65 per cent since 2000 (Sen, Reference Sen2018). Moreover, a survey conducted by the Manusher Jonno Foundation in 2015 found that around 70 per cent of households reported losses of land in the previous ten years, with 17 per cent reportedly the victims of land grabbing (MJF, 2015). Such a situation reveals not only illegal land acquisitions but also the incapacity of the judiciary to handle such abnormal behaviour. Weak judiciary systems are a feature of most developing countries, if only due to a lack of resources and a lack of human capital. In the case of Bangladesh, however, the situation is worse because of an implicit coalition of most actors within the judiciary, from clerks to lawyers to judges, in delaying the conclusion of cases, and repeatedly bribing plaintiffs to supposedly accelerate procedures. Meanwhile, land grabbers exploit the lands they have seized.

One could multiply the examples of ill-functioning public entities. What is surprising is that these are often well documented in the media and yet do not arouse any real corrective reaction by those government agencies that are supposed to control, in an independent way, behaviour that deviates from legal norms. The reason is that those agencies are, in effect, tightly controlled by the government. As an example, the head of the Anti-Corruption Commission is appointed, and may be dismissed discretionarily, by the government. In addition, the Commission must obtain the government’s permission to investigate or file any charges against bureaucrats or politicians. Even when granted such permission, the Commission may end up declaring suspected government members innocent, against existing evidence. This has recently occurred in the case of a widely publicised scam.Footnote ¹²

An interesting question in view of this situation is why such scandals do not help the opposition parties gain more support. One reason is their present weakness. Another is the conviction among the public that they were equally corrupt when in power, and would still be if they were to come back. This kind of affair is therefore considered something almost ‘ordinary’.

One could also consider that the abnormally low level of governance quality in Bangladesh is of lesser importance in the public opinion than the good performance of the economy. After all, incomes are growing and poverty falling, and even though inequality is increasing, most people have seen their standard of living improve. Thus, why should they care about poor governance?

Of course, this is fine as long as growth continues to be strong, with more RMG exports and more people going to work abroad. The challenge is that this may not last if no action is taken to diversify the economy and to prevent the growth engine slowing down in the coming years. Ill-functioning institutions may hinder a positive turnaround. This is one of the key elements of the institutional diagnostic that was established for Bangladesh.

F The Bangladesh Institutional Diagnostic

Medical diagnostics start with listing symptoms, before elaborating on the proximate causes of those symptoms and then identifying the deep factors that may permit or prevent correction of them. Our institutional diagnostic follows the same logic.

G Conclusion

The preceding diagnostic may seem unduly negative. This is essentially because it is in the nature of a diagnostic to identify existing flaws and potential obstacles to progress, rather than positive factors. Despite an institutional framework that is extremely weak by international standards, the Bangladeshi economy has been able to grow at a fast pace, to reduce poverty, and even to undertake important reforms in the past decades. Even within a turbulent political context, Bangladesh’s governments have shown a strong political will for reform on multiple occasions in the past, such as when they supported the RMG sector at an early stage, when they opted for rigorous macroeconomic policies, when they invested massively in power generation or liberalised imports, and when they opened up the economy. Political power, political determination, and policy wisdom were present in many uneasy but key decisions, as, for instance, when food rations were abolished on the grounds that they were a costly way of supporting the urban middle class, rather than the poor, or in the case of the pioneering introduction of food and, later, conditional cash transfers to accelerate universal primary school enrolment. In one way or another, the main question that arises from the preceding diagnostic is thus whether reforms aimed at eliminating notorious rent-seeking opportunities are much more difficult to achieve. Is the present Government of Bangladesh in a situation to undertake them, and is it willing to carry them out?

That the government is in the hands of a strongly dominant party ensures that political leverage for reforms does in principle exist. But at the same time the weakness of the opposition is a disadvantage because the threat it can issue against a wavering government is weak. Up to now, moreover, the economy has done well, with solid growth benefiting most of the population – though more so those at the top of the income scale – and without preventing part of the population having to go abroad to support their family. On grounds of pure political strategy, the incentives for reform may thus seem relatively weak. However, the present diagnostic has exhibited the serious risks to the future rate of growth in Bangladesh. At the top of the list, the COVID-19 pandemic has already slowed down growth, and potential geopolitical tensions in the post-COVID world add to the uncertainty arising from too specialised a development strategy. Taking advantage of the present political situation to launch reforms and to show results regarding both economic diversification and governance would do much to reinforce the party in power. If a power rotation takes place, on the other hand, these reforms would constrain the new government to follow the same principles of good governance and a sound rule of law, thus weakening its control over the opposition. For the party presently in power, and for the whole society, this is clearly a win-win strategy.

As mentioned at the beginning of this summary, the dichotomy observed in Bangladesh between weak institutions and robust growth was termed the ‘Bangladesh paradox’ or ‘Bangladesh surprise’. At the end of this diagnostic one may ask whether such a paradox or such a surprise will persist. The answer is most probably not. Either growth will slow down without institutional improvement, or growth, and the transformations that come with it, will continue at the same pace but institutions will have been reformed. It behoves the present government to decide which direction to choose, considering that the political opportunity for ambitious institutional reforms may not last.

A Geographical and Demographic Context

Today’s United Republic of Tanzania results from the union of Tanganyika – a large area a few degrees below the equator on the shores of the Indian Ocean – and the Zanzibar archipelago off its coast. Tanzania is the biggest of the eastern and southern African countries, excluding South Africa. Except for the coastal area and Zanzibar, it consists of extensive rolling plains, interrupted by the Great Rift Valley, which cuts across the east of the African continent from north to south. The Rift crosses Tanzania in its western part, where it is interspersed by Africa’s three great lakes – Victoria, Tanganyika, and Malawi (or Nyasa) – the shores of which are shared with neighbouring countries. Four major ecological regions are usually distinguished because of their highly differentiated climates: the mountain lands in the north (home to Kilimanjaro) and in the southwest receive generous amounts of rain; rainfall is also satisfactory in the lakeshore regions, especially lake Victoria’s; however, the high plateaus that fill the centre of the country are semi-arid, whereas the coastal area is both hot and humid.

Overall, the country enjoys a high agricultural potential, which is presently far from being fully exploited. Only 30 per cent of the land suitable for cultivation is being farmed, often under harsh conditions, despite numerous rivers and lakes, which offer a huge potential for irrigated agriculture. Other natural resources include minerals like gold, some other metals, and gemstones, and fuels (essentially coal and gas), of which abundant reserves have recently been discovered offshore. Another natural resource is the beauty of the country’s mountainous, sea, and savannah landscapes, as well as its world-famous reserves of wild animals, which altogether attract a considerable flow of tourists.

Tanzania is home to some 60 million people. Given its size, it is sparsely populated. However, as in most African countries, its population is growing very quickly and will reach 100 million before 2040. Because of the pace of demographic growth, the fast increase in the degree of urbanisation has not prevented the population density doubling in rural areas over the last thirty years, making land progressively less abundant.

The ethnic composition of the population is somewhat remarkable for its diversity, which is thought to have had a favourable influence on the early development of this part of Africa. About 120 different ethnic groups, most with their own language, cohabited for two centuries before colonisation, without any of them trying to dominate the others or to control the whole area. Still today, the largest group represents only 13 per cent of the population and the second largest only 4 per cent. Such an ethnic diversity is without any doubt due to the size of the area, the variety of its habitats, and the relative impracticability of travelling long distances. There is no doubt either that this demographic feature of Tanzania partly explains the political stability of the country once those heterogeneous groups were integrated into a single nation with a common language – the Swahili – and political institutions after independence. It also explains why Tanzania differs from its neighbouring countries and most sub-Saharan countries, where ethnic rivalry is frequent and has caused friction and conflicts that have proved harmful to development.

The presence of non-African racial minorities is another element in the heterogeneity of the population, with rather different implications. Arabs and Indians had always been present in the coastal area, the former being especially powerful when Zanzibar was the home of the Sultanate of Oman and controlled the whole East African shore from the late seventeenth to the late nineteenth century. More Indians arrived during the period when both Zanzibar and the mainland were under a British Protectorate. Like Arabs, Indians were especially active in trading, and more recently in light manufacturing. Both groups remain small minorities today, but their early business specialisation gave them economic power that is out of proportion to their demographic weight. The social distance between these groups and Tanzanian Africans is still detectable nowadays.

The European presence goes back to colonial times in the late nineteenth century, when Germany colonised the interior part of what is today mainland Tanzania, under the name of Tanganyika.

B A Short Account of Tanzania’s History Up to Independence

German rule did not last long since the Germans were forced to leave after being defeated in World War I. Yet, despite fierce hostility from the indigenous population, the German colonisers were able to develop major export crops (sisal, coffee, cotton), to start the construction of a railroad network, and to lay the foundations of an administrative structure, as well as an educational system.

After the German defeat in 1918, Great Britain was entrusted with the Protectorate of today’s mainland Tanzania. The country was then in a state of extreme underdevelopment, which had even worsened as a consequence of the fierce battles fought in that part of Africa between German, British, and Belgian colonisers, during the war. Yet two major factors prevented an economic development comparable to what could be observed in neighbouring British colonies. One was the relative lack of fertility of a large area in the interior of the country, which was invaded by the tsetse fly as a consequence of the war. The other was the limited attractiveness for European settlers of a territory whose political status was uncertain – being neither a colony nor an independent state. These may also be the reasons why the British administration was initially rather unambitious in its management of the country, mostly perpetuating the German colonial policies.

Things started to change after World War II as the newly created United Nations strengthened its control over territories with Protectorate status and pushed for more participation by the indigenous population. British ‘indirect rule’ was replaced by formal local governments with a multi-tier structure and increasing African involvement, while the Legislative Council of the Protectorate was progressively opened up to elected African members.

Independence was obtained peacefully. Under the leadership of Julius Nyerere, the Tanganyika African National Union (TANU) won practically all the seats on the Legislative Council open to election in 1958, and again in 1960. The British colonial secretary then acceded to TANU’s demand for a ‘responsible government’ by Africans. One year later, independence was declared, with TANU as the party of government and Nyerere as prime minister. Three years later, the new Republic united with Zanzibar, where a violent revolution against the Arab minority, which ruled the islands, had just brought to power an African-dominated party. Together, they formed the United Republic of Tanzania, with Nyerere as president.

C A Synthetic View of Tanzania’s History since Independence

D Economic Development Challenges

It would be tempting to say that the development of Tanzania since the mid-1990s – that is, after the transition to a market economy was fully achieved – has been a success story. On average, GDP grew at the rate of 6.2 per cent a year but, because of fast population growth, the growth rate of GDP per capita was only 3.4 per cent. Income per capita almost doubled over the last two decades, and Tanzania recently graduated from low-income to lower-middle-income status in the World Bank’s country classification. However, a careful review of the Tanzanian economy suggests that maintaining past rates of growth may raise serious challenges.

The first cause for concern is the uncertainty about what could be Tanzania’s long-run engine of growth. To a large extent, growth during the last two decades was pushed by the demand side of the economy, itself fed by increasing export revenues arising from improving terms of trade, and foreign financing. A sign of that bias is given by the exceptional dynamism of the construction sector, which grew twice as fast as the whole economy over the whole period. On the supply side, manufacturing has done slightly better than the rest of the economy, especially on export markets, but it is presently too small – less than 10 per cent of GDP – to significantly pull the economy forward. Agricultural exports have not over-performed either. Overall, it turns out that a good part of overall productivity gains over the last twenty years was due to a net reallocation of labour away from low-productivity agriculture to the rest of the economy. However, instead of being in favour of the high-productivity sectors, as in the celebrated Lewis model, the reallocation has concentrated on low-productivity sectors like retail trade or social and personal services. That such productivity gains are not sustainable in the long run is exemplified by the fact that productivity in these sectors has fallen, precisely because of the net influx of workers from agriculture. As high-productivity sectors absorbed only a tiny share of the net migration of workers, there is a risk that, without a powerful engine of growth in high-productivity sectors, labour will remain highly concentrated in the low-productivity part of the economy, thus contributing to slow overall economic growth, a slow reduction of poverty, and increasing inequality.

A second related challenge is precisely to selectively improve within-sector productivity, not to save on labour – the absorption of which is per se a major challenge – but, quite the contrary, to increase competitiveness in tradeable and reasonably labour-intensive sectors where autonomous development looks possible. Maintaining the investment rate at the 35 per cent of GDP level observed today should significantly contribute to this goal by drastically improving the infrastructure needed to achieve this objective. But such a high investment rate is itself a challenge. Exploiting untapped sources of efficiency gains is also needed. For instance, the difficulty of establishing firm land rights is often mentioned as a disincentive for innovation and investment in modern agriculture and agroindustry. The same is true of the lack of some skills in manufacturing, or rent seeking by bureaucrats.

The third challenge lies in freeing the economy from its strong dependency upon foreign financing. Even though it has declined over the recent years, foreign financing has always been sizeable. Official development assistance still represents 5 per cent of GDP – that is, a bit more than a quarter of the government budget and 14 per cent of gross investment. On various occasions, donors have mentioned their wish to reduce their support, arguing that this would be an incentive for the economy to become more autonomous. The Tanzanian government has explicitly concurred with this view. Yet it is unlikely that the current growth trend would be maintained if this flow was to dry up. Private foreign funds are not negligible either. Since the mid-2000s, foreign direct investment amounted to a little more than 3 per cent of GDP.

An important unknown for the future development of Tanzania is the fate of its huge offshore natural gas reserves, which were discovered in 2017. These could provide Tanzania with substantial additional revenues for twenty to thirty years after a five-year investment period. Their extraction cost is apparently high, so profitability requires an export price higher than has been observed throughout the 2010s. Negotiation with foreign companies for extraction, liquefaction, and export of gas broke down a few years ago, but they have just been reactivated. There is still much uncertainty about the extra income flow Tanzania could get in the long run from its gas reserves, even though earlier estimates suggested it could be modest if prices stay on their long-run trend.

A final cause for concern relates to the social side. Inequality has been increasing and poverty has receded at an unexpectedly slow pace. That growth has not trickled down more vigorously to all segments of the population is a challenge for the future. Increasing inequality may have adverse effects on future development through the demand side of the economy, by reducing the aggregate propensity to consume, and more fundamentally by undermining the social and political climate. The same remark applies to the stagnation of school enrolment, which is somewhat below universal primary schooling, and the low quality of the educational system in general, which may put future growth, poverty reduction, and the social equilibrium at risk.

More direct diagnostics of development challenges and firm manager surveys in Tanzania point to the lack of infrastructure, notably in electricity, the limited supply of skilled labour, and the low quality of the civil service and public service delivery as obstacles to accelerating, or even maintaining, the pace of economic growth. These obstacles are common to most low-income or lower-middle-income countries, however, so the real issue is whether Tanzania is successful in progressively overcoming them.

E The Perceived Quality of Institutions

The capacity of the country to address the development challenges summarised above depends on the quality of its institutions, which themselves will determine the effectiveness and inclusiveness of the policies that must be put in place. This is the goal of the in-depth study of Tanzania that is being summarised here. Before synthesising its conclusions, however, it is worth recalling the results of the thorough review of institutional indicators, and of opinion surveys undertaken in Tanzania, with the objective of getting a first idea of possible obstacles to future development.

According to several international databases on governance indicators, the most fragile institutional areas in Tanzania are the control of corruption, on the one hand, and government effectiveness, or administrative capacity, on the other. What is remarkable, however, is that in these two dimensions, as well as others, the quality of Tanzanian institutions turns out to be fully comparable to, and sometimes better than, its neighbours’ – except Rwanda for the business environment – and even institutions among low-income countries, which have done significantly better over the last three decades. Opinion surveys among the Tanzanian population and among various types of decision makers also point to corruption as a severe institutional weakness, and further stress several institutional factors that may hinder future development. These include land rights issues, ineffective checks and balances on the executive, weak regulation of big business and utilities, a poor investment climate, and an inefficient civil service.

Of course, the institutional indicators and the preceding list of shortcomings are mixed bags. Yet the general picture they draw of economically relevant institutional challenges in Tanzania is consistent with a cursory review of Tanzania’s political and economic history over the last three decades or so. It should also be noted that, when gathering personal opinions on the matter, we often heard that the control of corruption or state capacity are not worse in Tanzania than in comparator countries, and therefore cannot be considered as specific problems hindering Tanzanian development. This is not a convincing argument, though. Of course, these institutional weaknesses may have a negative impact in the other countries too. That they are present elsewhere does not mean that making progress at home on those institutional dimensions would not yield substantial benefits.

F Identifying Major Institutional Weaknesses

Having reviewed the main challenges of economic development, as well as the current political context of Tanzania, it is now time to focus more closely on institutional issues. Following the methodology set out in a previous chapter, the next step is to consider several thematic areas where development challenges are most apparent and are likely to provide evidence or hints on the way institutions help or hinder those changes that make development. Five such studies were conducted in the case of Tanzania. They focused on the following topics: (i) business and politics; (ii) state coordination and decentralisation; (iii) the civil service; (iv) land management; and (v) the regulation of the power sector. The main institutional weaknesses revealed by these studies are succinctly analysed in what follows.

The relationship between big business and politics has shaped Tanzanian development ever since independence. It is thus crucial to understand the nature of the forces that shape it, and their outcome.

A word about the players first. On the business side, most European capitalists left at the beginning of the socialist era and business was then essentially in the hands of Tanzanian Indians and, later, Arabs, a natural extension of the control they had very early on in trade activities. As a matter of fact, indigenous entrepreneurs at the head of medium and large firms or groups have always been a minority in Tanzania, to such an extent that there is only one African Tanzanian name in the list of the twelve richest businessmen in the country. On the political side, the government should be the main actor. However, the dominant party (CCM) has also played an important role because of the fragmentation of political power within the party – that is, the presence of several groups with major influence and with possibly diverging views on the ‘right’ policy. Nyerere was able for some time to control them, so that political power was reasonably centralised in the hands of the president, yet his grip had started to loosen by the end of his last term, possibly because of the disorder created by the nationalisation process and the multiplication of sources of rents linked to the expansion of parastatals and resulting from increasing disorganisation. Things became worse during the transition back to a market economy. On top of the opportunities arising from the privatisation drive, politically powerful individuals within CCM were able to make deals with businesses for their own interest, and then to impose them on the party and on the executive, using the prospect of party dismantlement as a threat. Deals could be of varying kinds. They could involve conceding competitive advantages to a business group against campaign financing, other indirect electoral benefits, or personal enrichment, or syphoning public resources through schemes involving private business. Major corruption scandals arose in those days, to such a point that donors suspended their aid on various occasions. A climax seems to have been reached at the end of the second term of Kikwete, Magufuli’s predecessor. The dominant party’s popularity was thereby severely damaged, and the party had to opt for an openly anti-corruption candidate to have a chance of winning the election. Over the last few years, the new president tried to turn the tide by attempting to regain the full control of the party, partly through internal politics, and partly by working to dry up those sources of rents originating in deals with the private sector, a strategy that led him to be particularly tough with both domestic and foreign big business.

Whether this strategy was successful, and whether it will be maintained, is still to be seen. Yet several interesting lessons can be drawn from this sketchy history of business and politics in Tanzania.

A first lesson is the utmost importance of the structure of political power. In Tanzania, the business–politics issue is not a ‘government versus private sector’ story only: it also comprises the control of the president over the dominant party. It is because the unity of the party is decisive at election times that it is difficult for the president to openly sack powerful party members who use their influence to sell competitive advantages to big business. This is a game with a bad equilibrium, where no player has an interest in making clean moves, with some entering into illegal deals and others not sanctioning departures from good conduct. At the end of the day, the personality, legitimacy, and authority of the leader is determinant.

A second lesson concerns the ineffectiveness of industrial policies, or even their fuzziness in a country where firms can buy direct competitive advantage through political friends. In Tanzania it has long been the case that ‘traders’ have an advantage over ‘industrialists’ because they are able to generate more resources and so to convince policymakers to maintain low tariffs on some strategic goods, the imports of which they control. Sugar and rice are typically goods which need some initial protection to generate the economies of scale that would make their cultivation and industrial transformation competitive. Absent this protection, they would be outcompeted by the imports favoured by the traders.

A third consequence of the varying relationship between business and politics since independence, and possibly of the dominance, until now, of big business by Tanzanian Asians and Arabs, is some heterogeneity or hesitation among policymakers about the latitude to be left to the market with respect to state authority. This situation creates some uncertainty, which is necessarily harmful to the economy.

Having established such a diagnostic, two questions should be asked. First, if vertical industrial policies fostering specific activities that are against the interests of dominant business groups are politically difficult to implement, why not promote horizontal policies that simply consist of improving the investment climate for all businesses by getting rid of numerous administrative frictions and burdens, whose main function is often to provide rent opportunities to certain bureaucrats? The point here is that corruption is contagious: it cannot be stopped in the middle range of the bureaucracy when illegal deals continue at the top. Also, it is not clear that dominant business interests could get a better investment climate than the one they enjoy through their partial control of politicians.

Second, can it be argued that the Tanzanian economy is doing relatively well, so that the business–politics collusion issue may not really be a big problem after all? Maybe, but the key question is whether it is possible to accelerate the present trend and, most importantly, to make it more sustainable and less uncertain in the future, when the external context may change and become less favourable? The relative weakness of tradeable sectors like agroindustry and manufacturing was underscored above, and it may be the case that the nature of the business and politics relationship bears some responsibility here. Yet progress has been made and it is unlikely that big business would not seize opportunities if they existed in these areas. On the other hand, choices may have been made that have curtailed these opportunities: think of the case mentioned earlier of the capture of some import markets that may have outcompeted domestic production.

This issue of central control, which is so clearly illustrated by the inherent difficulty faced by the executive in regulating big business groups, despite their crucial role in the dynamics of the economy, is present in other aspects of public management. Paradoxically, successive administrations have apparently been strongly determined to centralise decisions and control, even though such a move was not justified in some cases, while a deficit of coordination exists between the executive and various decentralised administrative units and public agencies. That lack of control gives some leeway to civil servants operating in those entities – and therefore provides rent-seeking opportunities, which they are happy to exploit.

There are various reasons for such a situation. First, it is objectively the case that some sectoral administrations are simply ill-structured, which sometimes results in overlapping responsibilities, inefficient management, and possibly rent seeking. Examples include the following: land management, with a National Land Use Planning Commission that is redundant due to the presence of the Direction of Urban and Rural Affairs in the Ministry of Agriculture; the lack of coordination between the Tanzanian Revenue Authority, responsible for tax collection, and the Minister of Finance, which decides about tax schedules; confusion of mandates between local government executives and central government-appointed officers; or the intricate set of relationships between local government authorities, the Prime Minister’s Office, the Minister of Finance, and various other ministries. Likewise, firm managers insist they must obtain the agreement of an abnormally high number of government agencies before they can market a new product or service, when only a couple of them could do the same job.

A second reason for coordination failures may be found in the complexity of various laws. The laws that govern the acquisition of land rights are especially intricate and require a heavy administrative apparatus, from central government to local village level. It is tempting for those in charge, and who are supposed to know the law, to take bribes from those who do not, or who are confused about certain aspects of the law. This is true at all levels: from an investor wishing to develop a large plantation to villagers concerned with the implications of leasing some of their land. The sensitivity of land rights in a country where a sizeable proportion of the land is cultivated by small farmers and is exchanged or transferred according to local customary laws is high. Hence the need for safeguards designed to avoid awkward situations in which villagers come to lease part of their land to a big company without knowing all the implications of such a transaction. The complexity of the existing law has been abundantly stressed and commented upon. Several reports have been commissioned which make suggestions for improving it, and successive governments have declared they would follow suit. Yet nothing has been done for the moment. The same complexity and procrastination is observed in the relationship between the central and local governments: a reform was voted on in the late 1990s and was supposed to be implemented by 2008, yet it is still pending more than ten year later.

Both the intricacy of the structure of public management and the complexity of the law may be related to another specificity of the Tanzanian economic culture: a selective distrust of market mechanisms. Such an attitude may be inherited from the socialist era, although the generation that had some responsibility during that time is now retiring. It is more likely due to the multiple cases of corruption that took place during the period of the return to a market economic regime – a period that was nicknamed Mzee Riukhsa (‘everything goes’) by Tanzanians. Likewise, in the 2010s, the leaders of CCM were afraid they would lose the coming election because of their tarnished image due to multimillion-dollar scandals. It is striking, too, to see how, in some respects, land laws appear to be reminiscent of the planning era and its deep suspicion of market mechanisms, and this despite the fact that the law was voted well after the end of the socialist regime. There may be good reasons for this, but too rigid a process of land allocation entails various types of costs and leads to missed economic opportunities that would benefit the whole country. Moreover, since market mechanisms will become more pervasive in the not-so-distant future, it may be good policy to quickly engineer a smooth transition to a more market-friendly environment.

The will to maintain electricity production and distribution as much as possible as a vertical public monopoly also betrays this bias against market mechanisms. It may be a holdover from the socialist era and the view that such critical goods as power should be publicly managed. However, it is more likely a reaction to earlier corruption scandals linked with the subcontracting of power generation to private firms. Despite such scandals, a public monopoly continues to be seen by the public, and by many policymakers, as a guarantee against private providers charging exorbitant prices. But it also provides influential politicians with rent-seeking opportunities, particularly in procurement operations, including with private power providers.

Institutional weaknesses in Tanzania’s public sector are also observed at a more basic level. Comparative institutional indicators, opinion surveys among ordinary people and various types of decision makers, and most policymakers converge in considering the under-performance of the civil service as a serious development impediment. The lack of resources, due to both the low level of income per capita and the limited share of recurrent public expenditures devoted to this service, certainly bears some responsibility for such a situation. But the overall setup of the delivery of public services plays a role too. The misalignment of civil servants’ incentives, the lack of effective monitoring and evaluation capacity, the high degree of corruption, as well as under-skilled staff and weak management of administrative units and government agencies, have also been regularly denounced. Two Public Service Reform Programmes have been carried out, which were supposed to make recruitment more rigorous and to introduce a dose of performance-based staff management. Improvements were noted, but serious challenges remain, and several observers felt – a few years ago – that some progress had even been reversed (see Mukandala, Reference Mukandala, Bourguignon and Wangwe2023). The culture of promotion based on seniority or partisan links, rather than merit, of recruitment based on other grounds than capacity, of shirking, of diverting resources, and of taking bribes is said to be still very present today.

All of these failings are difficult to quantify. Measurement of their economic consequences is still more of a challenge, except maybe in a few sectors. Because of the service it delivers and the size of the staff it employs, the education sector has been subject to more quantitative evaluation exercises than any other. There, the picture is far from favourable. On the supply side, teachers have long been castigated for their absenteeism – found to be as high as 31 per cent in a survey conducted in 2014. They are also frequently under-qualified, with a minority of them achieving the required standard in maths or English tests. The result is that even though school enrolment has progressed – though it is not yet fully universal – learning outcomes are poor. Half of Grade 4 children were not able to carry out two-digit subtraction in 2016. Although progress has apparently been made over recent years, a report by the World Bank concluded in 2018 that a ‘learning crisis remains in Tanzania’. Even though this kind of quantitative evaluation can hardly be performed in other areas of public sector activity, there is no reason to believe that their outcomes do not suffer from the same deficit of quality.

Results of surveys about the relationship between firms and the public administration, and anecdotal evidence, confirm the foregoing statement. They also suggest that corruption, in the form of giving and accepting bribes, is widespread. It has already been mentioned that Tanzanian political life has been interspersed with increasingly frequent and large corruption scandals, which are probably just the tip of the iceberg. The concern here is about ordinary corruption that is taking place between middle-tier civil servants with some rent-seeking power and firms or citizens. The root cause lies in weak or ill-defined institutional rules. Here, too, the perception is that progress has been made recently thanks to the energetic anti-corruption policy launched by President Magufuli. Judging from the absence of big scandals in recent years, this is probably accurate. At the ordinary level, however, data are not available to know whether Tanzanian society is in the process of moving away from this equilibrium whereby corruption has become a kind of social norm.

Infrastructure development, electricity in particular, is another area where the score of public management is pretty low by all standards, despite its crucial importance for economic development. As mentioned earlier, the production and distribution of electricity are managed by a public monopoly, TANESCO (Tanzania Electric Supply Company). This national company produces around half of the electricity it distributes, the other half being provided by private producers – after, occasionally, resounding corruption scandals relating to the way they were selected. Electricity has long been priced at a rather low level, which has prevented the public company expanding production and meeting demand, a situation that has resulted in economic growth not being as fast as it could have been with a proper power supply. The sector is regulated in parallel by the Ministry of Mining and a regulation agency, EWURA (Energy and Water Utilities Regulatory Authority), in another case of overlapping responsibility. A few years ago, EWURA endorsed an increase in the electricity prices charged by TANESCO, which was long overdue in view of inflation. Recently, the late President Magufuli opposed that increase. Despite the measure being fully justified and EWURA being internationally praised for its impeccable professionalism, its director was sacked. This was possible because in Tanzania the president has the power to singlehandedly appoint and fire the managers of public agencies, including EWURA, but also the Fair Competition Commission, the Central Bank, and the Commissioner Auditor General. The reason invoked for the sacking was that the price increase would hurt poor people and the ensuing social cost would allegedly be worse than stagnating production capacity in the future. This may well have been the opinion of the leadership, whereas the regulators thought differently. The institutional failure here may originate in either of the two following sources: the social criteria applied by the leadership were inadequately specified in its mission order, or the late president took the liberty of ignoring, and even criticising, legal expert opinion.

There thus seems to be a paradox in regard to the type of leadership exerted in Tanzania. Centralisation appears extreme, and probably excessive, in some areas, whereas in areas where it would be most needed it meets obstacles arising from the fragmentation of political power.

G The Institutional Diagnostic

We could continue to review evidence of institutional weaknesses in Tanzania, but the main conclusions to be derived from the thematic studies undertaken as part of our in-depth diagnostic methodology should be clear by now. Summarising as much as possible the points made in the preceding pages, the institutional challenges in Tanzania come under the few general headings shown in the right-hand-side column of the diagnostic table shown in Figure 3.1. In reading the table it must be borne in mind that its entries are not independent. For instance, rent seeking and corruption, which are seen to be ubiquitous in Tanzania, are partly caused by the inadequate structure of decision making and the weak regulation of business, as much as they are partly responsible for the under-performance of the civil service, including business regulation. Also, the order of appearance of the various headings is not necessarily related to the severity of the corresponding institutional challenges. As a matter of fact, their mutual dependency prevents us from establishing such a ranking.

Figure 3.1

Institutional diagnostic for Tanzania

Taken together or separately, these institutional weaknesses explain the economic challenges confronting Tanzanian development. For instance, it is easily understood that the difficulty of diversifying exports through appropriate industrial policies is related as much to the uneasy regulation of business, given its relationship with politics, the lack of coordination across administrations, and the poor investment climate created by the under-performance of the civil service. The same factors – and others – may explain the slow productivity gains in agriculture, or the lagging development of infrastructure – at least until the Magufuli administration. This relationship between institutional weaknesses and economic challenges is analysed in more detail in the original Tanzania case study.

Identifying and recording institutional challenges is one thing. However, a diagnostic would not be complete without an analysis of the factors that are responsible for them. The identified weaknesses are the symptoms, while the underlying problem may lie elsewhere. Most causal factors have been alluded to in the preceding pages and are listed in a summary way in the middle column of Figure 3.1. In reading it in connection with the column to its right, it is important to note that items at the same level in the two columns are not necessarily to be associated one to one. The misalignment of incentives in the public sector directly weakens the performance of the civil service, either directly through absenteeism or loose monitoring and evaluation, or indirectly through rent-seeking. At the same time, the poor delivery of public services may result in large part from the lack of skills or resources. Likewise, the nature of the leadership and, most importantly, its control over powerful factions within the party in power is essential to understand the structure of decision making, the extent of rent-seeking and corruption, and the difficulty of regulating business.

This control of the party is partly influenced by voters’ support, since political allies will defect if they expect a defeat in the next election. In turn, voters’ support depends on the trust inspired by the leadership through the transparency and accountability of its actions. The ability of a leader to oversee the public administration and the whole public decision-making process thus strongly depends on his/her personal capacity to control the political scene and to inspire trust in the population. Needless to say, the nature of the leadership item among the proximate causes of institutional weaknesses also includes the very motivation of the leader. In most preceding points it is implicitly assumed that the leader pursues the common good more than his/her personal interest or that of his/her clique, which indeed seems to have been the case in Tanzania since independence.

Finally, the issue arises of what could be done to combat those proximate causes of the identified institutional weaknesses. Getting more resources to improve the quality of public services, realigning incentives in the public sector, simplifying laws that are felt to be unnecessarily complex, and promoting transparency and accountability through more systematic monitoring and evaluation of the public administration and agencies are obvious measures that would improve the institutional framework of development. They are discussed in some detail in the Tanzania volume. They may raise trade-offs with economic efficiency, however, particularly when they require the collection of additional public resources. Most importantly, they generally generate both winners and losers, at least in the short and medium run, so that their implementation heavily depends on political economy factors. Beyond the proximate causes of the institutional weaknesses, there are deep factors which make the effects of these causes more or less easy to reduce. They appear in the left-hand column of Figure 3.1.

The nature of the political game that is played out in society is the first of these deep factors. On the one hand, the constitution sets the rules, assuming of course it is strictly applied and cannot be easily modified. For instance, it may be the case that it gives too much power to the executive in some areas – for instance, in appointing and suspending people in key positions. On the other hand, in any period there is a structure of political power which evolves only slowly over time – possibly as a function of the pace and structure of economic development – and which makes some reforms possible or impossible. After Nyerere in Tanzania, the fragmentation of the dominant party (CCM) into several factions made it difficult for the executive not to satisfy the demands of powerful factions since the risk would be the dismantlement of the party and the loss of power. As factions were often associated with business interests that provided them with political, if not monetary, benefits, the state was partly captured by business interests and, in some areas, unable to implement policies that would be detrimental to some of them although beneficial to the country. Modifying this equilibrium involves pure political confrontation between the main actors rather than policy reforms. Magufuli wanted to achieve such a change in the deep factors. It is not clear that he succeeded.

The ethnic structure of the population, including the concentration of big business in non-indigenous hands, or the presence of ethnic cultures and customary laws that sometimes conflict with the statutory law, and the historical legacy in terms of culture, ideology, religion, or trust among citizens, call for the same type of observation. These are deep factors which may affect the proximate causes of institutional weaknesses and may be subject to changes, most notably as a result of development itself, progress in education, or contacts with the rest of the world, but only over a long period.

Among the deep factors, the reference to the role of donors deserves some remarks. In the past, donors have clearly played a huge role in triggering major institutional changes in the way the Tanzanian economy works. This was obviously the case with the SAP, which caused the return to a market economy in the second half of the 1980s, but it has also been the case on several other occasions since then. The weight of donors in pushing reforms derives from the sizeable contribution of aid to the public budget and the domestic economy in general. For instance, the World Bank, which has always pushed for an ambitious decentralisation programme, suspended part of its funding in an effort to impose the decentralisation of the collection of the property tax in 2014 – which was nevertheless re-centralised a few years later. Likewise, donors have cancelled payments several times to protest against big corruption scandals involving government officials, and successfully requested that the latter resign from their positions. Outside these extreme cases, project and programme financing by the World Bank and other donors gives them the opportunity to express their views about the direction in which some institutions like the judiciary or tax collection authorities should be reformed. Even though it is up to the government to decide whether to accept such programmes or not, the funding provided by donors is not a feeble argument.

H Conclusion

The preceding remarks about the deep factors behind the proximate causes of the identified institutional weaknesses may be deemed overly pessimistic. They seem to imply that, at the end of the day, reforming institutions to make them more development-friendly is essentially a matter of politics, or possibly the endogenous consequence of development itself, or the long-run effect of educational progress. This pessimism must be somewhat tempered, though.

First, if big reforms are politically hard to impose, smaller reforms addressing some of the weaknesses detected at a minor level of political sensitivity might be consensual. It is probably in everybody’s interest that the educational system is run more effectively, bureaucratic services are competently and honestly delivered, and land management is more efficient. A lot of experimental work has been done in these areas in the economic development literature, which might be a source of inspiration for the design of these reforms. It is not the purpose of the present diagnostic to delve deeper into that kind of detail and it is sufficient to recognise that institutional improvement is now possible in specific sectoral areas.

Second, the Tanzanian economy has done rather well over the last two decades despite the institutional weaknesses uncovered in this in-depth institutional diagnostic exercise. We have stressed the fact that the weaknesses that were identified concerned the acceleration of the present pace of growth and its sustainability in the case of substantial changes in the international context. It cannot be excluded that the deep factors that are found to be obstacles to substantive institutional reforms may be progressively altered with the continuation of present development trends in the coming one or two decades. If this happens, some of the reforms suggested by the diagnostic might become more feasible, especially so if the political elite undertakes its own institutional diagnostic along the lines of the present exercise.

Instead of pessimism, lucidity is the right attitude to adopt in the face of the complex relationship between political economy institutions and development uncovered by the present diagnostic.