Academic journal article Atlantic Economic Journal

The Demand for Money in Socialist Tanzania

Academic journal article Atlantic Economic Journal

The Demand for Money in Socialist Tanzania

Article excerpt

The Demand for Money in Socialist Tanzania

Introduction

In advanced countries, monetary policy most often is employed in attempting to modify short-run business cycle fluctuations, although long-run price stability is likewise an important objective. Less developed countries, understandably, place greater policy emphasis on long-run economic growth. For these countries, money expansion is frequently a major source of government revenue. Public demand for this newly created money, in turn, has important implications for critical macroeconomic variables such as incomes, prices, and interest rates. As a consequence, money demand plays a central role in the success or failure of development policies.

Nevertheless, until recently, there was very little research on money demand in less developed countries.(1) Two early works were by Adekunle [1968] and Wong [1979].(2) Adekunle compared money demand functions for groups of countries which differed by their levels of development. Wong's study focused on the importance of including measures of credit restraint in money demand functions for developing countries. None of these studies contained data for African countries, many which did not receive political independence until the 1960's. Thus, very little is known about the monetary proclivities of people living on this continent. That gap in the literature was partially filled with the recent publication of three papers on money demand in Africa: Darrat [1985] on Kenya; Arize and Lott [1985] on Nigeria; and Domowitz and Elbadawi [1987] on the Sudan.

This paper presents results of the study of money demand in Tanzania, an East African nation which obtained its independence in 1961. To better understand the generality of its applicability, conventional monetary theory must be tested in a wide variety of settings, both temporally and geographically. From that perspective, the findings presented here are quite rich and merit attention for a number of reasons. First, as noted above, current knowledge about monetary relations in Africa is quite limited, and this paper extends the literature on that subject. Second, Tanzania is one of the poorest of the world's poor countries, significantly more so than Nigeria, Kenya, and the Sudan which were examined in previous studies. Tanzania's 1985 per capita gross domestic product of $295 is considerably exaggerated due to an over-valued exchange rate.(3)

Third, under President Julius Nyerere, Tanzania actively pursued socialist policies following the Arusha Declaration in 1967. Not only is available knowledge concerning money demand in a socialist setting scarce, but supporters of socialism frequently claim that individuals practicing socialism are driven by a different set of values than are individuals residing in capitalist countries. President Nyerere felt that was the case in Tanzania [Nyerere, 1969, p. 43-4].

"Certainly Tanzania was part of the Western

capitalist world while it was under colonial

domination, but it was very much on the fringe. Certainly our

independent nation inherited a few capitalist

institutions, and some of our people adopted capitalist and

individualistic ideas as a result of their education or

their envy of the colonial representatives whom they

encountered. But the masses of the people did not

become capitalistic, and are not filled with capitalist

ideas. By far the largest part of our economy is not

organized on capitalist lines. Indeed, whenever we try

to help Africans to become capitalist shopkeepers,

capitalist farmers, industrialists, etc., we find that

most of them fail because they cannot adopt the

capitalist practices which are essential to commercial

success. ....(D)ogmatists often attribute these African

failures to the machinations of a racial minority--thus

revealing their racialism and non-socialist

beliefs--instead of recognizing tha capitalism demands

certain attributes among its practitioners which the

majority of our people have never been forced to

acquire. …

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