The area that now comprises Tanzania came under the colonial dominance of Britain and Germany in the late 1880s and early 1890s. Britain assumed complete control of the area, which, at the time, was called Tanganyika, following the allied defeat of Germany in World War I. As a British colony, the economy of Tanganyika was based primarily on the production of cash crops , such as coffee, tea, and sisal, designated for consumption in the markets of the British metropole (the colonial power).
In 1961, Tanganyika achieved independence under the leadership of the Tanganyika African National Union (TANU), headed by Julius Nyerere. In 1964, Zanzibar, which was also a British colony, joined Tanganyika as a semi-autonomous island in a political union called the republic of Tanzania. As president of the republic, Nyerere worked with the TANU party to create a socialist society and economy. Policies directed towards realizing socialism in the economic sphere revolved around the complete public ownership of the economy, including all firms, factories, and industries. After 1967, the government also controlled the regulation, production, marketing, and distribution of agricultural cash crops, the country's major source of economic activity.
According to Khapoya, the author of the African Experience, the government's practice of economic control lost popular support with the intrusive "villagization" policies, in which numerous communities of rural Tanzanians were forced off their sacred ancestral lands and into new "development villages" that were better served with roads and other infrastructure . The development of a strong social sector, financed chiefly through aid from the Scandinavian countries, did not offset the resentment felt by many Tanzanians as a result of the villagization policies. Peasant resentment translated into a decline in productivity, which, in conjunction with the soaring increase of oil prices in the late 1970s, placed severe strains upon the Tanzanian economy.
To add to these problems, Tanzania was forced to spend US$500 million on a war effort aimed at repelling an invasion launched by neighboring Ugandan dictator Idi Amin in 1979. As a result of these economic strains, the Tanzanian government was obliged to borrow heavily from both foreign commercial banks and International Financial Institutions (IFIs), such as the World Bank and the International Monetary Fund (IMF).
By the early 1980s, the IFIs demanded that Tanzania implement a Structural Adjustment Program (SAP) designed to decrease the role of the government in the economy while increasing the role of the free market, in order to reschedule its debts and qualify for continued foreign aid. Though Nyerere himself refused to accept the SAP, his resignation as president in 1985 opened the way for his successor, Ali Hassan Mwinyi, to accept and implement the SAP reforms in 1986. Ten years later, an Enhanced Structural Adjustment Facility (ESAF) arrangement was made with the IMF, which focused on a major privatization campaign of selling state-owned enterprises to the private sector .
The economy of Tanzania continues to be based primarily on agricultural activity. Since the value of agricultural goods, which constitute Tanzania's major exports, is lower than the value of manufactured and consumer products, which comprise the country's major imports, the country runs a severe balance of trade deficit. The trade deficit, in turn, means that Tanzania must continue to borrow money in order to pay for its imports. In 1999, for example, the total debt stood at US$7.7 billion. According to the U.S. Department of State, the servicing of the debt absorbs about 40 percent of total government expenditures. In addition to loans, Tanzania is dependent upon foreign aid. In 1997 alone, Tanzania received US$963 million in aid. Most of Tanzania's exports are directed towards the markets of the European Union (EU), while aid also comes predominately from the countries of the EU.