Effects Of Institutional Quality,Trade Openness And Foreign Direct Investment On Economic Growth In Tanzania

This study investigates the impact of institutional quality,trade openness and foreign direct investment on economic growth in Tanzania using time series data from 1980 to 2019.The analysis is based on secondary data from the World Bank,Bank of Tanzania(Bo T)and the National Bureau of Statistics(NBS)which are considered credible data sources.The economic indicators show that during the past two decades,Tanzania managed to achieve a sustained average annual growth rate of 6.5%,one of the highest rates in Africa.Tanzania was formally upgraded from low-income country status(LIC)to lower-middle income country(LMIC)status in July,2020.This new reclassification status was attained due to the country’s growth in Gross National Income(GNI))per capita which rose to US$1,080 in 2019,exceeding the US$1,035 threshold set for LMIC.Other factors which made this economic progress possible include consistent macroeconomic stability,Tanzania’s strategic geographical position and its high levels of trade and FDI inflows during the past few decades.However,in terms of GDP per capita growth and poverty reduction,Tanzania is still considered one of the poorest countries in the world and the fourth poorest in Africa despite its huge potentials and comparative advantages relative to others in the region.In terms of inclusive growth,Tanzania is fairing behind many countries in the African region as shown in recent studies showing that 49% of the country’s population lives below the international poverty line(US$1.90 per day)notwithstanding its consistent high growth rates.It should be pointed out that the problems of poverty are not limited to Tanzania alone.Many other countries in the developing world especially in Sub-Saharan Africa(SSA)have made little improvements in their poverty reduction efforts during the past 40 years since major reforms were started.Studies also indicate that poverty is rising in Tanzania in contrast to expectations given the country’s high growth rates.While the East Asian region managed to lower the percentage of people living below the poverty line from 58% in 1981 to only 9% in 2004,the SSA region experienced almost negligible change in poverty reduction whereby a percentage of the populations living below the poverty line declined from 42% in 1981 to 41% in 2004.This is a very small change and it can be assumed that not much has changed since 2004.That means the percentage of the people living under the poverty line in Tanzania today(at nearly 50% of the population)is still higher than the African average.This is a contradiction that calls for more research investigations and this study aims to do just that.More broadly,the study seeks to examine the root causes of underperformance in Tanzania and African region at large,the assumption here being that the experiences in Tanzania are similar to other countries in the African region since both share a similar background.Specifically,the study seeks to investigate to what extend FDI inflows and trade liberalization has influenced economic growth in Tanzania during the period under investigation.Also,the study seeks to examine the role of institutional quality and governance in the quest for economic development in Tanzania and beyond.To address these questions,the study uses both theoretical analysis and empirical estimation techniques using the Unit Root Test,Johansen Co-integration Test and Vector Error Correlation Model(VECM)to determine the long-run relationship between the variables under investigation.In performing the stationarity tests,both the Augmented Dickey Fuller(ADF)and Philip Peron(PP)techniques were employed.The results showed that all variables were integrated in order one and were stationary at their first difference.Also,the Johansen Co-integration Test indicated an existence of co-integrating vectors which implied presence of long-run relationship between the variables which justified the use of VECM as an estimation technique.After the regression was performed using EViews software package and the above-named techniques,the results showed that all independent variables had a long-run relationship with dependent variable at 1% significance level except inflation,natural resource and public expenditure.Furthermore,the empirical results showed that both institutional quality and trade openness had a strong positive statistically significant relationship with economic growth at 1% confidence level but FDI had an insignificant relationship with economic growth at 5% confidence level.In terms of the effects of institutional quality on FDI promotion,the study findings showed a high correlation level between the two variables implyingThe findings also show that natural resource rents do not have a positive relationship with economic growth in line with the “resource curse” hypothesis promoted by some scholars.As a policy recommendation,this study suggests that developing countries like Tanzania need to improve their governance capabilities and the quality of their institutions.Additionally,deeper market reforms are necessary to remove the remaining trade obstacles and other bureaucratic factors if these countries are to attain an inclusive growth and substantial reductions in poverty.Also,the study recommends for increased investments in key sectors such as agriculture,one of labor-intensive sectors employing the majority of the population.