Effect of Trade Deficit on Tanzania's Macroeconomic Policy

In what ways has the sustained existence of a trade deficit influenced the conduct of macroeconomic policy in African states such as Tanzania?

Since independence African states like Tanzania have sought to use macroeconomic policy to pursue economic development to meet their own agendas as independent states (Mkandawire, 2004, p295). States sought to assert their new status in the world whilst raising living standards for their people. The states' ability to exhibit autonomy of action has been limited by the realities of their starting point, and world economic events, sustaining trade deficits influencing their actions.

First we look at the concepts of national income accounting underpinning the conduct of macroeconomic policy and at the states' economic objectives. Next are consideration of the states' starting position at independence and the conduct of policy. Factors include capability of the state and its degree of autonomy in taking actions to meet its policy objectives. Consideration of the way in which sustained trade deficits, a key area of the economy, has affected the conduct of macroeconomic policy then follows. We start with understanding national income accounting concepts.

National income (Sawyer, 2006, pp320-327) can be defined from earnings or expenditure and considered from aspects of activities of the residents of a state and with inclusion of flows of money into and out of the state. Gross Domestic Product (GDP) is the value of all the output produced within a national economy. GDP can be measured from an expenditure approach as:-

GDP=Consumption+Investment (in productive output)+Government Expenditure+Exports-Imports

Gross National Income (GNY) is defined as GDP plus income or transfers from abroad (eg remittances from residents working overseas or development aid).

GDP plus imports provides the resources available to an economy to use as consumption, investment and the production of exports. The resources used have to be equal to the resources available so the domestic absorption of resources on consumption, investment and producing exports has to equal the GDP plus imports and the net balance of transfers from abroad:-

Resources used=Consumption +Investment+Exports=Resources available=GDP+Imports+Net income from abroad

States can target progress for these components in their economy, the degree of public ownership of economic activities and setting taxation and local interest rates. They can target currency exchange rates but not the world markets' view of their currency's value or world interest rates. They cannot control world price levels for exports (unless they have a near monopoly as for diamonds in Africa). They cannot control how well other world economies perform and hence demand for exports. Hence states have to take action in response to events to try to ensure their policies deliver their goals. What goals will they set?

States wishing to raise its people's living standards and improve their quality of life has to achieve this by developing the economy, creating economic growth and increasing the economy's productive capacity. Population growth reduces each person's share; alternatively the population would have to reduce. Raising productivity requires investment, eg bringing more land into use, building and equipping factories, educating the workforce to raise skills, improving health to ensure people can work effectively and providing the required infrastructure (roads, ports, water and power supplies).

This investment can be funded by governments and the people forgoing consumption now to pay for the things that will benefit them in the future. That is not easy in a poor country with low levels of income and hence saving. Poverty limits levels of government taxation and resulting funds for investment. Remittances from abroad will depend upon people securing well paid work abroad to be able to send savings home, but risks losing productive workers. Running a trade deficit gains additional resources but the deficit has to be funded externally by loans or aid from abroad. These funds can have conditions governments find unacceptable, requiring clarity of the most necessary investments and how to fund them.

Political beliefs, as much as practicality and capability, will shape views. Most states were, and remain, poor with limited resources. States' economic objectives involve real economic growth and real and stable per capita income growth. Improved well being requires investment in health and education as well as raising incomes above the poverty level. Investment in infrastructure and social services requires above subsistence levels of earnings.

Earnings requires exports to earn foreign currency to buy imported goods the country cannot or does not wish to produce, or raw materials and intermediates for manufacturing or agriculture. Such earnings allow scope for investment to provide jobs and to raise local productivity. This improves the competitiveness of a country's products against imports and in world markets to improve export earnings. Earnings provide taxation to fund government expenditure.

Government expenditure provides internal and external security. States may also wish to play a role on the world stage taking part in activities by the UN or other institutions such as the WTO. By achieving real economic growth and improving living standards a state may seek to be envied by other states, improving its relative position as well as its absolute one, a demonstration of the results of political independence. What was the ability of African states to pursue essential economic growth?

Before independence African states had limited sovereignty and autonomy. Their controlling power ruled the country even if this was via local civil servants or tribal leaders and controlled external relationships. There was limited acceptance of the right of the people of an African state to act as a political community and chose leaders who could make decisions or choices on citizen's behalf. Any local decision making was subject to ratification by colonial masters. Economic structures were directed towards supplying raw materials to their colonial masters.

Upon independence governments were created, with sovereignty over the people, recognised externally by joining institutions like the United Nations, IMF and World Bank. The states also wanted to exert their own autonomy by making their own decisions independently of pressure from others. This included making and implementing macroeconomic policy.

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