Socialist Tanzania may be climbing out of its economic hole. Devaluation of currency, price hikes could win help from World Bank

The economy of socialist Tanzania - which many assert is one of the worst off in Africa - may be on the verge of improving. In order to pave the way for recovery, President Julius Nyerere, who for 20 years has guided his nation on a socialist path, has made a few economic compromises.

Some suggest he could have set the economy back on course more quickly after its 1978 collapse if he had made major compromises, which would probably have drawn more prompt help from international lending institutions. But President Nyerere has refused to take steps he thinks would require abandoning his socialist ideals.

Over the last three years, however, he has initiated economic measures sufficiently close to those suggested by the International Monetary Fund that negotiations under way with the World Bank could be successful.

If an agreement with the World Bank comes soon, Tanzania could climb out of its economic hole within five years, knowledgeable sources say. Those years will be a severe testing time for Nyerere and for the system he created.

It should be emphasized that Tanzania's economy is not as bad off as many analysts suggest. The economy is clearly in deep trouble - but no worse off than those of many other African nations, even though it is usually portrayed as worse off.

This reflects the sense of disappointment among those who saw a promising beacon for development based on equity in Nyerere's policies of socialism, radical agarian reform, and self-reliance.

Tanzania's economic collapse is also seen as justifying the view of those who argue that the capitalist road of development, rather than socialism, offers the best way forward for developing countries.

The steps taken by the Nyerere government that are close to IMF demands include substantial devaluation of the Tanzanian shilling and increased producer prices. These are economic measures that the lending institutions usually require for nations seeking their help, but they are also steps that basically do not compromise Nyerere's economic reforms.

The reforms have had some serious consequences, however. Devaluation has drastically reduced Tanzanian living standards, and higher producer prices have resulted in peasants having more money than there are goods to buy.

This is because the country's industry has been crippled by a lack of foreign exchange. Factories now work, on average, at only one-quarter of capacity. Manufacturing output has declined by more than 50 percent since 1978. Help from the World Bank is crucial because the government calculates that it will need at least $350 million a year for three years - over and above normal aid and borrowing - to rehabilitate its economy. It hopes that almost half of this will come from the IMF and the World Bank.

Tanzania's economic challenge is daunting. The gross domestic product is at a level 5 percent below that of 1978.

If deterioration of terms of trade is taken into account, the GDP decline is nearly 15 percent. And if population growth is taken into account, per capita decline from 1978 to the present is estimated at no less than 30 percent.

This gloomy picture contrasts strongly with the situation during the first decade of Tanzania's independence. Until 1977, when the rapid decline set in, Tanzania's growth rate was a steady 5 percent per year and external reserves were equal to a healthy five months of imports. There were overall budget and food surpluses.

What went wronG after 1977?

International economist Reginald Herbold Green has produced a checklist of the reasons for decline. The external factors he cites include:

* The effects of the breakup of the East African Community, made up of Tanzania, Kenya, and Uganda. The organization broke up in 1977 over ideological and other differences, including diverging views on capitalism and socialism.

* Massively increased costs of imported oil and fertilizer after 1973, as well as of higher costs of imported machinery.

* Serious drought since 1979.

* Deterioration in trade terms of 50 percent between 1977 and 1982.

* The huge cost of the military operation that overthrew Idi Amin in neighboring Uganda.

Internal factors for decline include inefficiency in government policies, such as mistakes in deciding foreign exchange allocations and the time lag in developing economic adjustment plans.

Besides the controversy over adopting capitalistic measures in a socialistic structure, Nyerere's critics point to two other issues:

1. His agrarian policies of forming farm collectives and moving peasants, sometimes against their will, from traditional homesteads to large villages (called ujamaa).

2. The poor performance of quasi-state organizations that buy, sell, and export domestic products.

But ideological criticisms don't explain why the first decade of transition to socialism was a success by most criteria.

The quasi-state organizations generated operating surpluses of more than 6 percent of GDP up to 1977, and most still generate substantial surpluses. Nevertheless, important weaknesses in their performance have become evident, and are being remedied.

As for criticism of Nyerere's agricultural policies, the highest four-year growth period in production was from 1975 to '78 - after ujamaa was begun.