Shrinking and financial development in Kenya and Tanzania, 1960-2020

Källarsalen Session 2: Paths towards sustained development in the global south: Historical lessons organized by Erik Green and Ellen Hillbom


Sascha Klocke, Tobias Axelsson


The failure of many countries in the Global South to catch up economically to the advanced economies of the Global North has long been a topic of interest to economic historians and development economists. Traditionally, researchers focused their attention on the question of growth –how can a country achieve growth to catch up? In recent years, however, a new research programme has begun to shift attention away from the question of economic growth to the question of how to avoid economic shrinking. This new strand of research shows that countries that have caught up did not experience significantly higher average growth rates in comparison to laggard countries. Instead, what sets them apart is their resilience to economic shrinking, i.e., that they have experienced fewer and less severe episodes in which annual GDP per capita growth was negative (Andersson 2018; Broadberry & Wallis 2016). A crucial factor identified as a determinant of increased resilience to economic shrinking has been identified as the set of social capabilities a country possesses, specifically transformation, inclusion, autonomy, and accountability (Andersson & Palacio 2017). It has also been hypothesised that the financial and monetary system play a key role in determining a country’s resilience to shrinking. This paper sets out to investigate the relationship between financial and monetary sector development in Kenya and Tanzania and their resilience to shrinking, focusing specifically on the aspects of central bank autonomy and accountability, which are important determinants of central bank performance (Lybek 2008). We find that, between 1960 and 2020, both Kenya and Tanzania experienced frequent shrinking episodes – on average once every four years in Kenya and once every 3.5 years in Tanzania, which significantly impacted their overall growth trajectory. These episodes were not distributed evenly over the sixty-year period, however, with Kenya experiencing shorter episodes of shrinking spaced out over the entire period, while Tanzania saw its shrinking episodes concentrated in the period of 1973-1994. This led to Tanzania falling behind Kenya from the 1970s onwards but catching up and converging since the mid-1990s. We also find a clear link between monetary sector reforms and central bank autonomy and accountability and the shrinking pattern in the two countries. The Kenyan central bank has had only limited autonomy since its inception and been held accountable primarily to the wishes of the Kenyan president instead of the overall country or national economy, as indicated by frequent and politically motivated changes in central bank governorship. In Tanzania, the central bank’s autonomy was initially likewise limited and the Tanzanian government tried to use the central bank as an active agent in the country’s development, resulting in the prolonged period of shrinking beginning in 1973. However, the second Bank of Tanzania Act of 1996 led to significant changes in the relationship between central bank and government, increasing the central bank autonomy, shifting accountability towards the general economy, and contributing to the absence of shrinking since.


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