At the beginning of the 1980s the Tanzanian economy found itself in an acute crisis. The crisis was triggered by exogenous factors, such as deteriorating terms of trade and the war with Uganda. More important, however, is the fact that the crisis was also a logical consequence of the development strategy followed by the country after the 1967 Arusha Declaration. The latter laid down the principle of self-reliance as the path to be followed in the years to come. The country turned its back on the world market and embarked on a voyage characterized by stagnation, external and internal imbalances, commodity scarcity and deteriorating physical and social infrastructure.
The economic system that was created proved unable to adjust its structure to the new demands brought about by external shocks. The market and the price mechanism had to a large extent been destroyed, and scarce goods were allocated mainly via administrative decisions. Public enterprises were subsidized while private activities were discouraged. As a result of the famous Ujamaa programme, the farming population had been forced to concentrate in artificially-created villages. Since the peasants received prices far below the market-clearing level for their produce, the establishment of a black (‘parallel’) market was the inevitable result. The industrial strategy, based on import substitution, had failed, new capacity being built while the already existing capacity could not be utilized for lack of inputs, particularly imported ones. The public sector had been rapidly expanded into all parts of the economy through external and internal borrowing. The overall result of all this was a drastically reduced standard of living for the average Tanzanian, from the late 1960s to the mid-1980s (Bevan et al. 1988).
During the first half of the 1980s a number of efforts were made to overcome the economic problems. The results, however, were modest, partly