Qn. Describe the growth of public sector expenditure in Tanzania over the last century.

Does it
improve the welfare of the Tanzanians?

Public expenditure is expenditure by the government on various government activities and social sector
services. Public expenditure is necessary for supporting the economy and economic activities. The
purpose of public expenditure is not limited to providing essential goods and services but also it
provides employment and liberal rights to use to its population.

In almost every type of economy, whether it is socialist, capitalist or mixed, government participates in
various economic activities directly and indirectly. Also, the government is responsible for establishing
the welfare state in a country. This results in huge expenditure or investment by the government.
Developing countries are generally characterized by lower socio-economic indicators, and widespread
poverty & inequality. Thus, developing countries require a higher level of public expenditure to
accelerate its economic growth social indicator.

Public sector reforms in Tanzania

In Tanzania since independence a number of reforms which are political, economic and administrative
have been effected. All these reforms were a result of the increasing need to respond by the
government to certain needs of citizens at a particular time. Also these reforms were effected with a
focus to ensure that the public sector is able to deliver quality, effective and efficient public services to
the citizens.

In 1961 up to 1966 the state adopted a nationalistic approach and nationalized all major means of the
economy, decolonization of administrative system, politicization of the army and proclamation of one
party state under TANU in 1965 (Mushi : 2000). These were just a few notable reforms which were taken
by the new independent state. The Arusha Declaration of 1967 up to the late 1980s, Tanzania saw a
dramatic expansion in the role of the state in all areas of the economy. State enterprises, whether newly
created or expropriated from the private sector, were heralded as the driving force of economic growth.
Wealth generated by these enterprises was intended to finance the expansion of a Civil Service, which
would provide free health care, education and other public services to create a well-educated and
healthy socialist utopia. Initial results were encouraging with impressive improvements in indicators
such as literacy and child mortality rates. However the growth of the Civil Service, though apparently
unstoppable, was evidenced more in terms of employment than productivity. (Graham and Richard;
1999)

CURRENT AND FUTURE CHALLENGES AND OPPORTUNITIES IN TANZANIA

Tanzania has undergone impressive political and economic developments and improvements in social
welfare in recent years. However, the country continues to face considerable development challenges,
not least in essential areas such as economic distribution, population growth, corruption and a stronger
division between party and state. At the same time, new opportunities are arising which have the
potential to become decisive for the necessary changes and reforms.
POVERTY AND INEQUALITY: High growth, but not for all

Tanzania has been a macro-economic success story for nearly two decades. The rate of economic
growth increased from 3.5 pct. in the 1990s to 7 pct. in the 2000s. Despite the global financial crisis,
growth rates have been remarkably stable over the last decade, and they are expected to continue or
even increase in the foreseeable future. At the same time, the country has experienced high population
growth – from 11 million people in 1963 to around 45 million in 2012. Population growth remains high,
at nearly 3 pct. annually. If this growth rate continues, there will be 53 million Tanzanians in 2018 and
100 million in 2042.

Economic growth and decades of massive international aid have created many good results, but it is
important to recall that the growth began from a very low starting point and that poverty in Tanzania
has proven extremely stubborn. With an annual GDP per capita of USD 532 (2011) and a Human
Development Index rank among the lowest 20%, Tanzania is one of the poorest 15 nations in the world.
More than two-thirds of the population live below the internationally recognized income poverty line of
USD 1.25 per day and almost 90 pct. live on under two dollars per day. Around one-third live below the
"basic needs poverty line" corresponding to around USD 0.96 per day.1 Measured by this limit, official
poverty levels declined slightly from 39% of the population in 1992 to 34% in 2007, to 28% in 2012. Due
to population growth, however, this relative decrease still means that the actual number of people living
below the poverty line has remained relatively constant level of 11-12 million Tanzanians. Official
surveys show a constant level of inequality from 2001 to 2007 (Gini 0.35). Other calculations, however,
show a 20% increase in inequality in the same period.2 The degree of inequality can be illustrated by the
fact that the richest 20% of Tanzania’s population accounts for 42% of total consumption, whereas the
poorest 20% consume only 7%.

The modest reduction in poverty illustrates that economic growth has not been sufficiently broad-based.
Growth is concentrated in telecommunications, financial services, retail trade, mining, tourism,
construction and manufacturing. While growth was formerly driven largely by public spending and
international aid, this is no longer the case. Growth today is generated mainly by the private sector, but
the sectors with the highest rates of growth are predominantly capital-intensive and concentrated in
large urban areas. Growth has largely failed to affect the great challenges, generating more employment
and additional jobs in all parts of society and improving incomes for the vast majority of the population.

One major cause for the lack of poverty reduction despite economic growth is that Tanzania has not
succeeded in raising productivity in agriculture over the last decades. Tanzania remains predominantly
agricultural, with three quarters of the population living in rural areas. Eighty percent of Tanzania’s poor
live in rural households. Growth in the agricultural sector remains low, at around 4% per year, and in the
rural areas the growth in productivity can barely keep up with population growth. The birth rates in rural
areas are high (6.1 births per woman compared to 3.7 in the urban areas).

While donors and the government have used significant resources to improve the social sectors, similar
necessary support has not been given to agriculture and other productive sectors. Lack of secure land
tenure to ensure that the traditional users in the rural districts do not lose their land is one of the most
essential issues, constraining investments that could enhance productivity. Processing of food and other
agricultural produce and other forms of manufacturing is also very limited in the rural areas creating
very few additional employment opportunities.

For the same reason, Tanzania is experiencing significant out-migration of young people from low
productivity agriculture to urban informal service sectors, where productivity is just as low.
Unemployment is high and growing rapidly, especially in the urban areas and among youth. The official
unemployment rate is 12% and is highest in the cities, reaching 32% in Dar es Salaam (2006). In addition,
one-third of those employed are so-called "working poor": technically employed, but whose income is
less than the basic needs poverty line of USD 0.96 per day. They often work either in farming or in the
urban informal service sector in low-productivity, part-time jobs. An estimated 700,000 new young job-
seekers enter the labor market each year, but only a fraction of them have a realistic possibility of
obtaining a stable job that can give them the possibility to provide for a family. The flow from
countryside to city of rural-urban migration will continue in years ahead, and Dar es Salaam is already
one of the fastest growing cities in Africa.

In sharp contrast to the largely stagnating extreme poverty, Tanzania has seen the emergence of a small,
but growing urban middle class. It is a relatively small group, only around 10% of the population, but it
has growing purchasing power, substantial political influence, and it has posed political and economic
demands - for cheap electricity, imported goods, and better urban social services and infra-structure in
the urban areas. The Government is working hard to meet these demands, through for instance, large
subsidies for cheap electricity, comprehensive tax exemptions to foreign and national companies as well
as government employees, and large non-taxed per diem allowances for civil servants. These
government’s attempts to satisfy the middle class run the risk of further increasing, rather than
reducing, the inequality in society. This can threaten the continued peace and stability as well as social
cohesion in Tanzania.

With the recent discoveries of significant gas reserves in addition to its already large mineral resources,
Tanzania’s long-term economic prospects appear promising, and these resources have already attracted
foreign investors. However, the benefits to be derived from the exploitation of natural resources will not
significantly materialize for another 10 years or so, and it is crucial to ensure macroeconomic
management. In recent years, the Government has increased its use of both interest-bearing and low
interest concessional borrowing. As a result of the increased borrowing, Tanzania’s public debt has
jumped from 28% to 40% of GDP in only four years. The debt continues to grow rapidly, with
corresponding increase in debt servicing and repayment. The country’s financial sustainability is not yet
threatened, but debt management has become increasingly more important, and there is a strong need
for significant strengthening of control of public investments. There is especially a need for greater
openness in public contracts and procurement.
EXTERNAL ASSISTANCE TO TANZANIA

High economic growth and domestic revenue partly in the form of taxes have resulted in some
reduction of Tanzania’s historically high aid dependency. However, aid continues to finance nearly one-
third of all public expenditures (corresponding to almost 8% of GDP). This may change drastically over
the next decade, where continued high growth and increased revenue from natural gas may reduce the
importance of development assistance.

Tanzania has been at the forefront of the global move towards enhancing aid effectiveness. A central
element of this effort was a move towards general budget support (GBS) to the government from 2000.
While the share of GBS in the total aid package has not increased as much as expected, more than two-
thirds of all reported ODA flows through government systems in various ways, and a third of this is GBS
proper. While overall ODA to Tanzania has continuously increased over the past five years, the
proportion between modalities has changed, with GBS declining relatively, baskets remaining stable and
project support increasing.

Studies of the impact of development assistance to Tanzania show that it has made a real difference in
the areas where the resources have actually been targeted. This is especially true for the social sectors,
where aid from abroad has also led the government’s to prioritize use of its own resources, and where
the total aid effort has contributing to improvements in sectors covered by the MDGs. The aid,
especially in the form of GBS and Basket modalities, has also led to demands and has contributed to
improved national financial systems and stronger management and accountability in public
administration.

GOOD GOVERNANCE, PUBLIC SECTOR CAPACITY AND PROBLEMS WITH CORRUPTION

In terms of good governance, Tanzania achieves average scores in global rankings. One sign of progress
is that citizens are beginning to demand more insight and influence than previously. Citizens,
parliament, media and civil society are increasingly demanding that the government act responsibly, and
that it be accountable to the population. Tanzania has also recently seen improvements in budget
transparency and people’s access to information, but the political environment continues to be
dominated by a top-down approach. The government is constantly challenged on issues of effectiveness
and rule of law, and the fight against corruption continues to be one of Tanzania’s major challenges.

Decades of reforms in the public sector have resulted in Tanzania scoring relatively better than most
other African countries on Public Financial Management (PFM). A wide range of laws, regulatory bodies
and systems have been enacted and implemented over the last 15 years. Procurement regulation is of
international standard, but it continues to be a challenge to ensure compliance with these standards.
Public budgets have become more transparent and open, but the citizens’ active engagement in these
issues continues to be modest. The oversight capacity of the National Audit Office continues to improve,
and its reports are being discussed among the public and in parliament, but following up the Audit
Office’s recommendations continues to be a challenge.
Over the past decade, the government has been successful in increasing tax revenues, partly through
more effective tax administration. Collections correspond to almost 18% of GDP, which is high by African
standards. A challenge for the future is to revise tax policies so that the tax burden is distributed more
broadly in society. Of particular concern is the large amount of tax exemptions, which is estimated to
cause annual losses of almost 4% of GDP. In addition, the complex and non-transparent system of
exemptions contributes to corruption. Rationalizing of the system and reducing the number of
exemptions requires a comprehensive technical and professional effort and capacity, but political will
and resolve are equally important.

Corruption remains a central and serious challenge for Tanzania, in terms of both good governance and
for the entire social development. The levels of petty and grand corruption identified in international
and domestic surveys continue to be of considerable concern and affect all sectors of the economy from
public service delivery to natural resource exploitation, industrial production and business. The formal
anti-corruption legislation and anti-corruption institutions in Tanzania are comparable to those of most
other African countries. Hence, in principle, there should also be good possibilities to initiate a far more
effective struggle against corruption, but this requires a combination of political commitment and
increased engagement from the media, civil society and the parliament. There have been some positive
developments in recent years, but key challenges remain in implementing and enforcing the legislation.
Similarly, it is a great problem that very few of the corruption cases end up being prosecuted in the
courts.

New major opportunities and initiatives are underway. Steps have been taken to implement legislation
ilegislation and to meet the standards promoted by organisations such as the Extractive Industries
Transparency Initiative (EITI). This entails strengthening of domestic revenue and financial management,
and positive developments within PFM reforms. Crucial, however, is a continued strengthening of the
systems and mechanisms for openness, accountability and transparency in the public system.

CURRENT SITUATION:

Contribution of public sector expenditure towards welfare of Tanzanian.

Health Care

Today, the health system in Tanzania Mainland is operated through a range of programmes, including
social assistance, complementary health insurance, community health fi nancing, and other
mechanisms, such as micro-insur-ance and private health care. Capturing all of the expenditures and the
sources of funding of the health system and its coverage of the population has proved to be dif-fi cult
because of insuffi cient consolidated data.
The Government is the main provider of health services, which are admin-istered by the Ministry of
Health and Social Welfare, and the President’s Office Regional Administration and local government. Th
e social health system is fi nanced by revenues from taxation, donors and fees for services. Fee-for-
service charges do not apply for the treatment of children aged under fi ve and diseases such as
tuberculosis, AIDS, epidemics and leprosy. Th ese elements represent only 2.5 per cent of total health
expenditure.
The picture of the health budget for 2005/2006 is set out in Figure 2.2Recurrent expenditure is fi nanced
through taxation (60 per cent of total health expenditure) and development expenditure (construction
of hospitals, etc.) represent on average 17 per cent of the total cost of the health budget of which 81 per
cent was donor funded.
Globally, over the period 2002-2006, 45 per cent of the national health system was donor funded. Th is
means that the development of an adequate health system depends signifi cantly on the capacity and
willingness of donors. It also presents some degree of unreliability when projecting health costs and
budgeting.

In addition, there are two social insurance funds off ering health and medical coverage: The National
Health Insurance Fund (NHIF) providing the main access to health services, aft er the state tax-fi nanced
health programmes; and the National Social Security Fund (NSSF). Coverage by both schemes is low. In
2005, NSSF had 9,000 members of its health fund, just 3.4 per cent of its total active membership. Th e
NHIF had 242,580 active registered members and, including dependents, a total of 1 million people were
covered. However, the quantitative examination of NHIF, which is set out in the main Report, shows that
the present level of reserves is too high for a health insurance scheme, and the level of contribution
levied exceeds that needed for liabilities of a short-term benefi t fund. Th is shows there is a need to
reduce contribu-tion levels/improve benefi ts. Th e NHIF is aware of these issues.

Social Budget

Th e Social Budget is in two parts: the status quo base-line 2006/2007 and a fi ft een-year projection. Th
e Report sets out a detailed picture of income and expenditure as well as assumptions (demographic,
labour market, etc.) and sources of data used. It looks at the resources allocated to diff erent types of
social protection with reference to diff erent contingencies and diff erent populations. It draws attention
to the role of international cooperation, focusing on aid (grants) and debt relief. It sets out the position
for formal social security schemes as well as applying the results from the NGO study on non-
contributory provision, income and expenditure to both the status quo scenario and the projections. Th
e Report refers to both total Government expenditures and Social Budget expenditures for comparative
purposes.

The current picture on the expenditure side for 2006/2007 is that 5.1 per cent of GDP went to
education, total health expenditure was 3.3 per cent of GDP, social assistance expenditure by the
Government was 0.4 per cent of GDP and by NGOs 0.5 per cent of GDP, all benefi ts paid by pension
funds was 1.2 per cent of GDP, and by the Government, 0.2 per cent of GDP. Total social expenditure
was 10.7 per cent of GDP.

This is shown in detail in Figure below

Overall social expenditure will increase to 15.6% of GDP in 2020/2021. If measured as percentage of the
overall resource envelope (including central government budget, social security funds and resources
devoted social expenditure would take 40 per cent of overall resources available in 2020/21, compared
to one third in 2005/2006 Th is increase in social expenditure includes:

1. Increase in expenditure on education from nearly 4 per cent of GDP in 2005/2006 to 5.2 per cent of
GDP (15% of the overall resources) in 2020/2021, due to the increase in the number of children and
assumed signifi cant improvements in the teacher/students ratio.

2. Increase in expenditure on health care from 3.2 per cent of GDP in 2005/2006 to 6.4% of GDP in
2020/2021. Such a substantial increase would have to take place in order to achieve the targets specifi
ed in MKUKUTA. In this scenario, by 2013/2014 health expenditure is expected to exceed education
expenditure. How-ever, such an increase will actually take place only if matching additional resources on
the revenue side of the social budget will be made available.
3. Increase in expenditure on pension benefi ts paid (including early withdrawals) from the pension
funds from 0.9 per cent to 3 per cent of GDP over 15 years.In 2005/2006, the surplus of the social
security fund (or the change in reserves) rep-resented 1.4 per cent of GDP. Th is amount is expected to
decrease considerably in future, to reach nearly zero level at the end of the projection period. Th e
reason for this decrease is the large defi cit that PSPF and LAPF will incur if the Government does not
meet its funding obligations.
In summary, during the period from 2005/2006 to 2020/2021, total social expenditures are projected to
increase by 7.1 percentage points of GDP, including:
☐ education, increase by 1.2 percentage points;

☐ health care, increase by 3.2 percentage points;

☐ government social welfare programmes, increase by 0.3 percentage points;
☐ pension benefi ts, increase by 2.1 percentage points;
☐ social insurance administrative expenses, decrease by 0.2 percentage points and
☐ annual change in social insurance reserves, decrease by 1.4 percentage points of GDP.4
Th us, the structure of general Government expenditure will change. At the end of the projection period,
the public health system will consume 16 per cent of the total budget. At the same time, the share of
education will decline slightly from almost 15 per cent in 2005/2006 to 14 per cent in 2020/2021. Th e
shares of social insurance fund expenditures will decrease from 9.4 to 8.1 per cent.

QN. State and interpret the second theorem of welfare economics. What conditions must be met for it
to hold?

he Second Fundamental Theorem of Welfare Economics states that, if every consumer has convex
preferences and every firm has a convex production set then any Pareto-efficient allocation can be
decentralized as a competitive equilibrium

The second welfare theorem tells us that social welfare in an economy can be maximized at an
equilibrium given a suitable redistribution of the endowments. We examine welfare maximization
without redistribution.

The second theorem of welfare economics has certain advantages over first theorem of welfare
economics. It explains that if all consumers have convex preferences and all firms have convex
production possibility sets then Pareto efficient allocation can be achieved. The equilibrium of a
complete set of competitive markets are suitable for redistribution of initial endowments.

In the second welfare theorem, Pareto efficient allocation is A*. In such A* allocation, individual h has
consumption xh*. Firm j produces the output yj*. We know that at A* is a point where all consumers will
have the same marginal rates of substitution between all pairs of commodities. Let’s assume that
pi denote the consumers’ marginal rate of substitution between commodity i and commodity 1.

Conditions for the second theorem of welfare to hold.

 The equilibrium must occur at a particular resource allocation

 The allocation must be Pareto optimal.
REFERENCES:
Bank of Tanzania. Economic Bulletin, Various Issues. Dar es Salaam, Tanzania.
Demery, L., and Squire, L., 1996. Macroeconomic Adjustment and Poverty in Africa: an Emerging
Picture. World Bank Research Observer, Vol. 11, No. 1: pp. 39-59.
Eele, G., J. Semboja, S. Likwelile, and S. Ackroyd, 2000. Meeting International Poverty Targets in
Tanzania. Development Policy Review, Vol. 18, pp. 63-83.