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Uganda needs more factory workers than entrepreneurs

Ramathan Ggoobi

Uganda needs more factory workers than entrepreneurs

More entrepreneurship is not what Uganda needs; economies of scale are.

 

The best way to raise household incomes and living standards is not necessarily to make everyone an entrepreneur!

There is excitement in town. This euphoria has been created by the proposed Youth Livelihood Programme that you, with a promise that your government is going to provide a total of Shs. 265 billion to the youth to enable them get involved in entrepreneurial activities.

You also transferred Pius Bigirimana from the Office of Prime Minister to the Ministry of Gender, Labour and Social Development to handle the money. The Inspector General of Police, Gen. Kale Kayihura, let the cat out of the bag when in one of the infamous leaked recordings said the reason you had changed Bigirimana to his current address was “so that we can use the money without much trouble.”

Indeed at the launch of the Youth Livelihood Programme (YLP) in January last year, Bigirimana said the Shs. 265 billion “would come in handy to offer the youth with equipment suitable for them to start their own businesses.”

So the excitement among the young people is understandable. The YLP is coming at a time when there is fad about entrepreneurship in the global development community. Nearly everyone is speaking highly enough of the role entrepreneurship can play in reducing poverty and fighting unemployment in developing countries such as Uganda.

Today, every young boy and girl that leaves school wants to start a “small business” of his/her own. Media is also doing a great job promoting entrepreneurship. From Pakasa Forum to Young Entrepreneurs Programme, the buzz is on!  

We need factories

The Youth Venture Fund may have failed; private initiatives such as Enterprise Uganda may not have achieved much in their entrepreneurship training programmes; and the mortality rate of small-and-medium enterprises (SMEs) may have reached alarming levels, but one fact remains — entrepreneurship is the career path in vogue.

There is an ongoing debate among economists as to whether developing countries such as Uganda can be transformed through entrepreneurship. One fact that seems to be beyond debate is that none of the developed countries was built by entrepreneurs. Every single one of them was transformed by factory workers who had left agriculture during the industrial revolution. The industrial revolution was pioneered by the State. Entrepreneurs came in at later stages to take advantage of the opportunities created by industrialization.       

Mr. President, the reason I picked pen and paper this week was to bring you to the speed of the ongoing debates concerning economic transformation of poor countries. Many researchers have found that although entrepreneurship may help reduce poverty in the short term, these so-called small-and-medium entrepreneurs do not add the most to the economy’s productive capacity in the long term.

Consider a common-sense question: How big can an SME in a Ugandan village or even here in Kampala city grow? There are not many customers, and incomes are not very high either. A business would have to serve several villages to start creating jobs in any significant numbers.

Businesses that serve lots of customers take advantage of economies of scale in production and distribution. These economies of scale are essential for economic growth.

Create economies of scale

Researchers have long found that an economy is more productive not when every single person is an entrepreneur, but when a minority of entrepreneurs employ the majority of people. This is exactly what made countries such as China and South Korea perform the growth miracles they performed between 1970s and 1990s.

More entrepreneurship is not what Uganda needs; economies of scale are. The most productive economies are the ones that balance economies of scale with the benefits of competition. Too many businesses, and workers will fall short of their maximum productivity. Too few businesses, and monopolists will gouge consumers, quash innovation, and fail to serve the entire market.

What Uganda needs today are massive industrial parks, agribusiness facilities, and research centers to create thousands of jobs at a stroke and employ the young people whose lives are being subjected to sheer gambling through entrepreneurship, youth funds etc.

Most of these programs will remain a lot more efficient at generating heartwarming stories than they will at creating jobs. In almost all the progressing countries — the tigers of East Asia, those breeding in Latin America, and a few in Africa — the quickest way to escape poverty is to board a bus to the nearest city for a manufacturing job.

To increase household incomes so that Ugandans can create wealth, we need to industrialize, beginning with the agricultural sector. Industrialization of agriculture will create and stabilize demand for agricultural produce, a precondition necessary in order to transform Ugandans from subsistence to commercially oriented farming.

We need agro-processing plants

In order for us to walk the talk of modernizing and commercializing agriculture, we must change from the ‘old economics’ of “Supply Creates its Own Demand” (the so-called Say’s Law) to the more empirically proven economics of “Demand Creates its Own Supply”.

In Uganda, agriculture has over the years been promoted on the premise that “production is the source of demand.” That is, that the farmers should produce because the market for their produce (particularly food) is guaranteed. Indeed whenever peasants failed to produce enough or to sustain production, they were accused of being lazy.  

The old theory above (of supply creating its own demand) may not work because agricultural markets are very volatile and production and supply are inelastic due to long gestation periods.      

It is the lower demand for agricultural produce that generate a self-ful?lling equilibrium with low levels of productivity and production and farmers’ uncertainty. People cannot have the incentive to produce more if their harvest goes to waste or is bought at lower prices than they anticipated.

In order to provide incentive to peasants across the country to commercialize their activities and increase their productivity and production levels, we need to stabilize demand for agricultural produce. This can be achieved through small-and medium-scale agro-processing.     

Agro-processing plants, spread across the country, will help to add value to farmers’ produce, reduce waste, increase demand for agricultural produce, stabilize prices, and hence reduce uncertainty in agriculture.

They will also create forward and backward linkages to smallholder farmers’ activities. A maize mill, for example, would add value to maize (i.e. the flour) and other processes will manufacture more high-value products, such as cornflakes, starch (a main ingredient in plastics and confectioners), alcohol (whiskey and ethanol), margarine oil, glue, and medicine (penicillin and cornsilk for treating urinary tract infections including diabetes and cancer).

On the other hand, the maize stalks and husks would be crushed into animal feeds, while the cobs would be used to make products such as charcoal (biomass briquettes).   

Mr. President, to actualize agricultural modernization in Uganda, we need to start with industrialization of the sector. Although it is relatively an expensive model, it is also the most practical and cost-effective.  

“Mulembeke” slogan is poisonous

Mr. President, for the entire period you have been President of this country (and you know it is not a short time), only three countries have so far graduated from LDC status: Botswana in December 1994, Cape Verde in December 2007 and Maldives in January 2011. In March 2009, the UN’s Committee for Development Policy (CDP) recommended the graduation of Equatorial Guinea. All these countries have got one thing in common; they have something of value they export, which they created through industrial policy.

The United Nations Conference on Trade and Development (UNCTAD) has classified Uganda as a services exporter. This is because services account for at least 45% of our total exports of goods and services. We do not qualify even for an agricultural and food exporter. Yet Uganda is predominantly a rural economy — with rural population as large as 80%.

Like many other stagnant LDCs, Uganda has failed to create productive jobs and livelihoods for the thousands of its young people who enter the labour force each year. We are encouraging our youth to gamble with their future through entrepreneurship as if everyone was born to be an entrepreneur. We have squandered all opportunities available to turn our people into productive citizens.    

Lesotho and Madagascar have taken full advantage of AGOA (African Growth and Opportunity Act) and have created employment for their people. For example, Lesotho, a country of about 2 million people, created over 400,000 jobs in 2012 through AGOA.

Mr. President, stop squandering taxpayers’ money on populist programmes that only work to extend the tragedy of “easy money” mentality you created among Ugandans through your old slogan, “mulembeke”. The best way to raise household incomes and living standards is not necessarily to make everyone an entrepreneur! To takeoff, Uganda needs more factory workers than entrepreneurs.

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Ramathan Ggoobi

Ramathan Ggoobi is Policy Analyst, and Researcher. He lecturers economics at Makerere University Business School (MUBS) and has co-authored several studies on Uganda's economy. For the past ten years, he has published a weekly column 'Are You Listening Mr. President' in The Sunrise Newspaper, Uganda's Leading Weekly

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