What can we do to build capacity of Ugandans to compete in regional and international markets?
Last week, “Elusive quest for ‘Made in Uganda’ label” in which I indicated how, and why, it was difficult to find a processed product with a label “Made in Uganda” in a shop or supermarket in Uganda.
At the end of the article I promised to come back this week with proposals of what we should do to get Uganda’s economy back on track. In particular, I promised to show what countries are doing to build capacity of their people to compete in regional and international markets. Here we go:
I will start with a disclaimer. I am not a fan of policy reversal; neither do I subscribe to unilateral trade policy reforms. Nowhere, among the possible measures to put “Made in Uganda” products to our supermarkets, and to the regional and international markets, should we adopt unilateral policies (policies that impose trade restrictions — prohibitive tariffs on imports, quotas, total ban of particular imports etc.).
It is important for us not to forget that the world has changed a lot. Globalization (the shift toward a more integrated and interdependent world economy) has meant that markets have become more integrated, more open and thus global.
The world economy is increasingly being experienced as “one place”, courtesy of rapid decline in barriers to the free flow of goods, services, and capital, as well as the rapid technological changes that have reduced the cost of doing business and thus helped to reduce trade barriers.
For example, the average tariff rate on manufactured products has globally reduced from 30% in 1913 to 3.5% today. We are living in a world ruled by multilateral engagements such as the World Trade Organisation (WTO), as well as regional integrations such as the East African Community (EAC).
We are expanding markets to sell what?
So we may not succeed in adopting particular policies that countries, in the years gone by, used to use to protect local entrepreneurs to build capacity, such as those mentioned above — tariff, total ban of particular imports that may be produced home (such as toothpicks, juices, etc).
Yet we need to build capacity to compete in this global jungle. How do we go about it? There are a number of pragmatic and “second-best” approaches that several countries, which have succeeded in taking advantage of globalisation, have used to build export oriented economies.
Mr. President, I really get amused when I see you working so hard to get the EAC countries integrated, yet your government has failed, quite squarely, to help our indigenous small industrialists and other producers to build capacity to export in the region. The countries we want to integrate and federate with, such as Kenya, Rwanda, and Tanzania are doing it. So how do we expect to benefit from these expanded markets? What will Ugandans sell in the regional markets we are building?
Recent studies found that Uganda’s revealed comparative advantage (measured by the relative weight of a percentage of total export of commodity in a nation over the percentage of world export in that commodity) is vegetables. Imagine! That we can only compete in selling edible grass (nakati, ddoodo, bbugga etc). My country!
Well, textbook economics teaches us that strengthening the competitiveness of domestic enterprises, particularly small and medium enterprises (SMEs), is vital for a developing country, such as ours, to benefit fully from regional and international trade. Competitiveness is measured by a nation’s ability to produce goods and services that meet the test of international markets while simultaneously maintaining and expanding the real incomes of its people over the long term.
Building enterprise competitiveness
An important element in improving competitiveness is building domestic capabilities. Our economists at Finance and trade ministries are still frozen in the theories that tend to think that the ability to compete in international markets is dependent on macroeconomic policies and conditions (trade policies, inflation, and exchange rates etc.). Paul Krugman calls this a “dangerous obsession”.
Researchers have long found that getting the macroeconomic fundamentals right will not necessarily lead to competitiveness, particularly if the enterprise sector is weak, that is, if there is little or no productive (supply) capacity. The laboratory to test this is Uganda.
We need active micro-policies and measures aimed at shaping new industrial locations. We need to help our indigenous enterprises to restructure their activities and facilities. We need to build enterprise competitiveness — the ability to sustain a market position by supplying quality products on time and at competitive prices.
Mr. President, listen to this: competitiveness is created by deliberate collective action rather than being mere products of the invisible hand of the market. To make our SMEs competitive, government must stop being an extraneous variable. It must be at the centre of the action.
From a policy perspective, we need what economists refer to as meso-level institutions (in-between micro and macro institutions). We need to reduce the talking and the speeches (how Uganda needs value addition, how we must industrialise, etc.) and concentrate our energies on building problem-solving capabilities that enable indigenous enterprises to improve their productivity and to imitate and adapt products.
To achieve this, we need to provide serious business development services (BDS). Successful nations, in East Asia and elsewhere, have provided their SMEs with BDS, recognizing that financial support alone is not enough for achieving sustained enterprise competitiveness. BDS interventions may include training, consulting, technical and managerial assistance, marketing, physical infrastructure and policy advocacy.
In our case someone may say agencies such as Private Sector Foundation Uganda, Uganda National Chamber of Commerce and Industry, Uganda Manufacturers Association and others are doing exactly that. Never! You may need to visit countries such as Morocco and see what building BDS means.
Moroccan enterprises have improved the design and quality of their leather goods and upgraded their marketing skills through a deliberate campaign championed by the Moroccan government. As a result of this effort, Moroccan companies succeeded in obtaining new export orders for leather goods from Japan and Europe, generating employment for women and young people in the sector.
To build export competitiveness, we also need to form clusters — when economic actors concentrate along a value chain within a geographically delimited space. Clustering helps to deepen and broaden the knowledge base of companies, including design, quality control and information related to markets and marketing, and the establishment of linkages to a wider set of technology inputs and actors.
We need to build more science parks or technical incubators (the likely of UIRI — the Uganda Industrial Research Institute) and enable grouping together of “start-ups” of small businesses based on more advanced technologies.
Rethink the policy framework
Existing natural clusters such as Katwe should be linked up with technical institutes, the likes of Makerere, Kyambogo and Busitema Universities, to enable them benefit from the technological advice and incubation. Likewise, schools that teach business, such as Makerere University Business School, should be funded and empowered to engage in research that the business community may need to build capacity, expand, and sustain themselves.
Our businesses are very poor at marketing and developing franchises. Yet our universities and business schools are not equipped to teach these practical skills. For example, there is something disturbing I found out last week. Most of our fast food stores (takeaways) in Kampala, the likes of Javas, KFC, Chicken Tonight, Nandos, etc. buy Irish potatoes for making chips from Kenya.
On inquiring why this is the case, operators and owners of these “takeaways” said our Irish potatoes are small in size, and thus they make smaller chips (smaller in size) yet consumers prefer bigger/longer chips. Where is the research? Why can’t we research in potato varieties to make our Irish potatoes bigger?
Lastly, we need to rethink our policy framework. The economic model we are following largely ignored the microeconomic conditions for development and SMEs. Development requires not only macroeconomic and political stability, but also well-functioning markets and institutions. The overly restrictive fiscal and monetary policies, often advocated for by the worshipers of IMF swinging in the air-conditioned offices at Bank of Uganda and Ministry of Finance, are defeating Uganda’s industrial policy. IMF nearly destroyed Thailand’s economy and its SMEs, had it not been for Japan’s help towards Thai SMEs.
I am eagerly waiting for the second National Development Plan (NDP) and see how our planners at National Planning Authority (NPA) hope to create decent jobs to absorb the massive surplus labour currently getting off land. What we are doing now — unleashing unproductive young people direct into the service sector, where they enter the informal sector as boda-boda riders, vendors of Chinese products, bar attendants, sports betters, musicians, comedians, etc. — will not deliver us to the promised land.