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Why Uganda’s economy is bad: Part III

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Why Uganda’s economy is bad: Part III

The Budget Speech and the State of the Nation Address confirmed how denial is so often the preface to justification!

Minister of Finance Matiya Kasaija

Minister of Finance Matiya Kasaija

In the continued series intended to explain the on-going economic malaise, you came out to attack those of us who have been commenting about the poor state of the economy.

“I have seen people writing in newspapers that our economy is in bad shape; poor people, they have eyes but don’t see,” you said while delivering the State of the Nation (SOTN), adding, “An economy which has got surplus electricity for the first time cannot be in a bad shape.”

Without going into unnecessary digression – reminding you that a country where only 2 of 10 people have access to electricity cannot at the same time have surplus electricity – your explanation is similar to someone who says, “A person with surplus food cannot be sick.”

Well, Mr. President, a week before you delivered the SOTN, I wrote in these very pages a piece where I concluded thus, “The good thing is that next week, I will have the benefit of your State of the Nation Address and the budget to see whether you are ready to have a fresh beginning or steady progress means we can have the luxury to stay wrong.”

It appears to me that you chose the latter. You have refused to recognise the truth, no matter how apparent it is has become. The truth is that the economy is in a state that warrants some kind of jump-starting. You condemned us who are offering free advice of “giving a pessimistic view of the economy.”

Failure to change economic structure

Mr. President, it is Laurence Peters who once said, “A pessimist is a person who looks both ways before crossing a one way road.” Except for novices, Ugandans know it is not advisable to cross any road in Kampala, no matter whether it is one-way, without looking both ways. In short, in Uganda if you want to survive longer, stay a pessimist.

Last week, I promised to come back with a few suggestions on the way out of this apparent malaise you preferred to deny. That is what I want to concentrate on here.

First, we must reorient public investment and incentives towards heavy investment in industrialisation, particularly manufacturing if we are to change the structure of this economy. Mr. President, the relative economic progress that your government brought has not substantially changed the structure of the economy.

The sector that contributes the lowest to GDP (agriculture) is the one employing over 70% of Ugandans! The economy is not creating enough jobs; doesn’t generate enough tax revenue to support the growing expenditures of government; doesn’t redistribute incomes amongst the people.

To change this picture, government and the private sector need to do a few things differently. Economic history reveals that all advanced countries, including the newly industrialising countries in Asia, broke the vicious circle of underdevelopment through industrialisation.

Failure to industrialise

Virtually all of today’s industrialised nations actively supported and protected their industries through specific policies and institutions. I know the authorities at the helm of our economy do not want to hear anything to do with industrial policy (state interventionist policies that stimulate specific economic activities and promote structural change).

They have failed to realise that the current overall development agenda in Uganda, following the private sector-led strategy with government focusing on providing a ‘facilitating environment’, is a fallacy.

Granted they believe in markets so much, but why have they also failed to understand that even market economies need industrialisation policy to produce what to the markets demand? How else do they hope to change the structure of the economy?

It is conventionally known that development is fundamentally about structural change, and structural change is essentially about industrialisation. There is a time Uganda’s economy, though small, performed so well that the World Bank wrote a book that predicted were we to continue on that path, Uganda would be declared a developed country by the year 2000.

For example, at independence in 1962, Uganda exported processed/manufactured goods worth £29.6 million (UGX 136 billion), and imported processed/manufactured goods worth only £133,000 (or UGX 611 million at today’s exchange rate), turning a surplus of £29.4 million on its trade balance (BOT).

Unprocessed agricultural exports

This is the time when the country ‘picked stocks’ i.e. pursued industrial and industrialisation policies. Back then, the industrial establishment in the country was being promoted and largely financed by the government through the Uganda Development Corporation (UDC). This is the time when government subsidised interest rates to spur domestic investments. It is the time when the state provided direct loans and equity capital anchored on export discipline.

Since 1980s to date, however, when Uganda stopped picking stocks, the country has experienced a BOT deficit year-in-year-out. The deficit has grown from USD 83 million (UGX 298 billion) in 1980 to USD 2.8 billion (UGX 10 trillion) in 2016.

The reason industrialisation policy in Uganda has failed can be attributed to two factors: (1) state failure between 1970s and 1980s, and (2) market failure during the 1990s to date. Mr. President, your economic advisers should stop confusing you: industrialisation failed in 1970s and ‘80s not because government intervened; it failed because of state failure under Amin and the cocktail of subsequent governments.

Likewise, the reason you have failed to build industries is because your government put a lot of trust in markets. You thought private investors, indigenous or foreign, would invest in manufacturing with minimal help from the state. This has never worked anywhere.

A quick look at the composition of Uganda’s exports in the past two years gives a clear picture how we have failed to industrialise (see Uganda’s exports in the graph). We are exporting mainly commodities (unprocessed agricultural produce and minerals). On the other hand, when it comes to imports, manufactured goods dominate.

 

Uganda’s leading exports and their performance in 2015 and 2016 (figures in million dollars)

Uganda’s leading exports and their performance in 2015 and 2016 (figures in million dollars

To build industries, manufacturing in particular, we shall need strong institutional support, affordable development finance, smart and quality infrastructure, readily available technical and managerial skills, reliable supply of raw materials, all of which can only be guaranteed by the state.

Political bias in project selection

Mr. President, learn it from me if you still doubted that serious industrialisation everywhere has been spearheaded by the state. No country has ever industrialised, and certainly will, with private sector-led growth strategy. We lost it the moment we thought that private sector will do everything.

Although Uganda made mistakes in the past by thinking that political directions should govern, there is urgent need to have a second look at the free-market economic system currently prevailing. We need to identify the role of the state, where markets are failing and where they are missing. However, we should not select projects on political basis. The mistake we are currently making in the roads sector.

Mr. President, your government’s current industrial strategy is haphazard, unfocussed and does not support manufacturing. In the past 30 years, manufacturing has contributed, on average, only 7% to total GDP, only 4.2% to total exports, and only 20% to the value added within industry itself.

Manufacturing in Uganda is dominated by SMEs, which account for over 90% of the enterprises and generating over 80% of the manufactured output. It is largely engaged in the production of low value goods: processed food (40%), tobacco and beverages (20%), chemicals, print, soap and foam products (10%), metallic fabrication (8%), brick and cement (8%), wood and wood products.

Foreign companies have made some investments in textiles, steel mills, tanneries, bottling and brewing, and cement production. We need to expand this area if we want to create jobs, raise incomes for sustained growth.

Sandal-making ‘entrepreneurs’!

Secondly, we must increase investment in agriculture (using the value-chain approach) in order to increase production of raw materials for agro-manufacturing sector. We need to invest at least 8% of the budget in all stages of the chain – production and productivity, post-harvest handling, value addition (processing), and marketing.

That is the only way we shall exploit the comparative advantage in agricultural commodities such as coffee, cotton, tea and food stuffs to accumulate the volumes that attract big manufacturing industries. Mr. President, let Uganda be known for producing, processing, and manufacturing agricultural products. We are hardly known for anything nowadays!

Some people often argue that Uganda does not have what it takes to build manufacturing industries. Well, economists argue that, even in absence of comparative advantage, it might be necessary to set up industries which will never be competitive but which are needed to keep per capita incomes and employment rising.

Mr. President, on the budget day I saw you displaying a pair of sandals and some shirts, apparently ‘manufactured’ by some youth you funded. That should not be the approach. Your lone, benevolent efforts will remain a lot more efficient at generating heartwarming stories in Serena Conference Centre and other hotels, than they will at creating productive jobs.

Like I have written in these pages again and again, Uganda needs more factory workers than your sandal-making ‘entrepreneurs’. As “late industrialisers”, we needs to directly invest in strategic industries such as iron and steel industry, petroleum refining, and agro-manufacturing among others.

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