Question

Economic Growth and Poverty Reduction

The relationship between growth and poverty lies at the heart of development economics with

recent empirical studies showing that that economic growth is important for poverty reduction.

However, it has also been recognized that the distribution of assets, opportunities and incomes

influences the effect of growth on poverty reduction. For poverty reduction to occur, the

relevance of distribution and, as well, the importance of sources of growth has been

underscored. The challenge is to influence the pattern of growth such that proportionate

growth is generated.

Poverty can be categorized into income poverty and non-income poverty, reflecting human

development attributes. Poverty in Tanzania is pervasive with some 18.7 per cent of

Tanzanians living below the food poverty line and 35.7 per cent living below the basic needs

poverty line. Poverty is largely a rural phenomenon, as 87 per cent of all the poor live in rural

areas. Primary schools with gross enrolment reached 98.6 per cent in 2002 compared to 77.6

per cent in 1990, with net enrolment rising from 58.8 per cent in 1990 to 80.7 per cent in 2002.

The illiteracy rate is still high at 28.6 per cent. Access to health services has shown modest

improvement with 70 per cent of the sick visiting health facilities.

Access to health facilities is generally limited by the system of user charges (cost sharing)

coupled with a weak screening system for identifying deserving cases for exemptions.

Distance to health facilities is another factor hindering access. The population that has access

to clean water is 53 per cent in rural areas and 73 per cent in urban areas.

In the early 1990s, economic performance was extremely weak, with growth in GDP often less

than the growth in population. Growth appears to have increased steadily since the mid-1990s

when greater effort was put into institutional reforms. By 2002, the growth rate had reached

6.2 per cent, although it declined somewhat to 5.7 per cent in 2003, following the effects of

drought. The most recent information on poverty trends in Tanzania shows that, in spite of the

rising rate of economic growth, the declines in income poverty for the last decade were very

modest. The key challenge is whether, and to what extent, growth will translate into poverty

reduction over the coming years. Two crucial issues have been raised regarding these

achievements. The first issue relates to the sustainability of economic growth itself – whether

such growth rates, high by historical standards, will continue and reach eight per cent as

envisaged in Vision 2025. The second issue relates to whether this growth will be translated

into poverty reduction, contrary to the experience of the last decade. This will depend on the

sources of growth and how the gains from growth will be distributed among households.

Macroeconomic Policies and Poverty Reduction

The poverty focus of macroeconomic policies calls for a new framework that can capture some

of the trade-offs and distributional implications of traditional macroeconomic policies and

shocks. Macroeconomic policies that are meant to achieve pro-poor growth need to have the

elements to address the distributional impact of growth. Growth is pro-poor if it uses assets

that the poor own, if it favours sectors in which the poor work and if it occurs in the areas

where the poor live. These points, however, are rarely decoded into detailed reforms to make

policies pro-poor in practice. Pro-poor policies imply that the social and economic indicators

of poor people improve more rapidly than those of the rest of society.

Macroeconomic policies are likely to stimulate pro-poor growth by addressing two main issues.

First, macroeconomic policies may be designed to contribute to enhancing the basic human

capabilities of the poor. It has been argued that universal coverage of basic social services of

good quality is key for ensuring equitable growth. Second, macroeconomic policies may be

designed to contribute to fostering the concentration of growth in economic sectors that can

directly benefit the poor. Different sources of growth affect poverty and inequality differently

because they affect factor returns differently, and because the poor and the non-poor own

factors in different proportions. Poverty reduction is more likely to be achieved when a

significant share of growth originates from sectors in which the poor are active. The major

challenge to researchers is, therefore, to identify policies or a combination of policies that

generate growth without adverse distributional effects or, even better, generate pro-poor

growth with improving distributional effects.

In the context of Tanzania, recent experience has shown that in the macroeconomic policy

area, two main areas deserve special attention if macroeconomic policy is to be more

supportive of pro-poor growth. First is fiscal policy whereby tax policy issues regarding effort,

efficiency and equity are still on the agenda. Tax reforms have been driven by the need to

broaden the tax base and rationalize the tax system. Tax measures that have been taken

recently have been directed to stimulate investment and production in general. However,

large-scale investors have been given greater tax relief through Tanzania Investment Centre

(TIC) certificates, which are only available to investors above a specified investment threshold.

Small investors in the SME sector rarely hold TIC certificates.

On the public expenditure side, the challenge of making expenditures pro-poor lends itself to

setting priorities, targeting and allocating expenditures according to priorities and targeted

programs. The recent opportunity to enhance allocations to social sectors, following HIPC debt

relief, has improved allocations to these sectors. Second is monetary policy and financial

sector reform. Monetary policy that has been adopted in Tanzania has been driven by the goal of price stability. The target has been low inflation. Overall, it can be observed that high

inflation rates hurt the poor most. Therefore,

reducing inflation rates that has been done so far can be regarded as a pro-poor policy move.

However, there is concern that the narrow focus on price stability is not sufficient for poverty

reduction to be realized. There is need to make monetary and fiscal policy consistent with and

supportive of poverty reducing objectives such as growth and employment.

On the side of financial sector reform, the opportunity for these reforms to be pro-poor has

largely been missed to the extent the sectors which have least access to financial services

are groups which are associated with poor people, such as SMEs and rural activities.

QUESTION TWO                   

Poverty can be categorized into income poverty and non-income poverty, reflecting human

development attributes. Poverty in Tanzania is pervasive with some 18.7 per cent of

Tanzanians living below the food poverty line and 35.7 per cent living below the basic needs

poverty line. Poverty is largely a rural phenomenon, as 87 per cent of all the poor live in rural

areas

2.1 In light of the above, discuss the strategy that is used by Tanzania in order to ensure

an equitable distribution of income.                

2.2 The Tanzanian government adopted a policy of nationalisation as a way of putting

the major means of production and distribution into the hands of the majority.

Evaluate the costs and benefits of this policy in Tanzania.              

Answer 1

Ans 2.1

Tanzania’s GDP growth rate has been weak in the recent past decades. However, the incidence of equitable distribution of income has been challengeable. Though Tanzania’s recent policies such as fiscal policy and tax policy has been very helpful for the country’s growth which will indirectly increase equitable distribution of income.

The strategies which can be used by Tanzania are monetary policy to reform its financial sector and foreign policy for direct investments in the country which will lead to equitable distribution of income in the country.

Ans 2.2

The policy adopted by Tanzanian government of nationalization is way of production and distribution has two sides, the tax collection and expenditure side. The collection side involves good and non-goods tax which observe equity principles, fairness, progressivity, and ability. The expenditure side focuses on the distribution of the collected revenues.

On the expenditure side, the needs-based requirement for allocation of resources to local government areas is effective. Most urban local government areas had relatively more agricultural extension staff, teachers, and health workers than rural areas.

The cost of the policy has poor governance and short term production challenges but at the same time it has long term many benefits such as reform economic growth and sustainable economy.