Pathways to prosperity: Analysing the dilemma of choosing between official development assistance and foreign direct investment in Tanzania

Abstract

This paper explores the complex-decision decision-making process faced by policymakers in Tanzania when selecting between Official Development Assistance (ODA) and Foreign Direct Investment (FDI) for driving economic prosperity. It employs the Vector Error Correction Model (VECM) to capture dynamic interrelationships among long-run co-integrated variables. Analysing yearly time series data from 1980 to 2021, the study reveals that variables used in the analysis exhibit a co-integrating relationship and that they have a long-term equilibrium relationship. Official Development Assistance per capita lagged to one period and is significantly and negatively related to the growth rate of Gross Domestic Product (GDP). Furthermore, ODA per capita lagged to two periods is significantly and negatively related to the growth rate of GDP, and ODA lagged to three periods is negatively related to the growth rate of GDP. Additionally, FDI per capita lagged to one period and is negatively related to GDP. The paper highlights the complexity of the decision-making process and recommends that policymakers assess financing strategies, explore factors hindering positive contributions of FDI and ODA and prioritize domestic investment to foster self-reliance and reduce dependence on external funding sources.