An alternative policy response to Uganda’s economic challenges

By Robin D. Kibuka Ph. D

Uganda’s current challenges with food shortages, food inflation and overall price inflation, and a vola­tile exchange rate increasingly appear to be more entrenched than originally thought and are likely to continue to exert pressure on overall macroeconomic and poverty outcomes for some time to come.

In particular, the emerging imbalances in the agricultural sector — where the majority of Ugandans earn a living pro­ducing food, raw materials, and exports for the economy — are cause for concern. An underlying medium-to long-term increase in demand for agricultural and other products is being fuelled by rapid population growth and growing regional market integration, with Uganda’s rural areas attracting expanding cross-border food purchases, especially from Kenya and Sudan, which have more serious droughts and internal food imbalances.

However, on the supply side, in addi­tion to the impact of the drought, the country’s agricultural potential is ham­pered by longer-term pressures from low yields, crop diseases, poor road and elec­tricity access, inadequate finance, storage, fertiliser use, research, and irrigation. These are compounded by environmental degradation; soil erosion, deforestation, overfishing, and depletion of wetlands.

The resulting relatively slower growth in agriculture; average annual rate of 1.4 per cent during 2005/06-2010/11) compared with an overall GDP average growth rate of about 7.8 per cent over the same period, has led to declining shares of agriculture in overall GDP (from 18.3 per cent to 13.9 per cent of the total, at 2002 constant prices) even though the sec­tor still employs over 70 per cent of the population. The low investment share allocated to agriculture (about 4 per cent of the total budgetary resources) is partly an issue as well.

The sharp deterioration in the balance of payments current account (from -7.8 per cent of GD in 2205/06 to -12.4 per cent in 2009/10) reflects in part poor performance by agricultural exports (accounting for about 60 per cent of total merchandise exports) while imports have grown rap­idly. Increased volatility and depreciation in the exchange rate are making agri­cultural inputs more expensive and will further slow the growth of the sector. On the other hand, higher than planned infla­tion and lower than expected agricultural growth will continue to dampen efforts to reduce poverty and attain the Millennium Development Goals.

The policy response to these deep-seat­ed problems should therefore embrace longer-term agricultural demand and supply-side issues, if a durable solution is to emerge.

In particular, Uganda’s endeavour to reach middle-income-country status needs to focus initially on a comprehen­sive agricultural transformation before eventually shifting to industrialisation.

Historical lessons from Europe, the US and Asia

The case for a successful agricultural transformation preceding industrialisa­tion is rooted in historical examples in the UK, US, and Asia. During the 19th century, the UK’s Industrial Revolu­tion was facilitated by a prior successful Agricultural Revolution. The sustained improvement in the UK’s agricultural productivity enabled the sector to release its surplus labour and profits, which were channelled into and fuelled the industrial revolution.

The US similarly went through a criti­cal agricultural transformation prior to its successful industrialisation. While most of us today are more aware of the cutting edge technology in California’s Silicon Valley, fewer people know about the more historically important agricul­tural Central Valley in California, which served as an important growth engine and constitutes the breadbasket of the region. The US, in particular, managed to harness its many universities (especially the land grant universities) to spearhead cutting-edge agricultural research, which was instrumental in the transformation of the sector.

Japan also went through major agri­cultural reforms and transformation (the Meiji Restoration during 1868-1912) before industrialising and becoming an economic power. During the 1960s and 1970s, the emerging Asian countries ben­efited from the Green Revolution (mira­cle rice, use of irrigation, and fertiliser) with funding from the Rockefeller and Ford Foundations, and the World Bank, among others. Even though during the 1960s Uganda, Ghana, and several other African countries were at a comparable level of development with Asian coun­terparts like India, Malaysia, Korea and Indonesia, the African countries today lag behind economically in large part because agricultural production has remained largely untransformed.

The recent relative decline in the share of agriculture in GDP in Uganda, though on the surface consistent with historical trends in the UK, US, and Asia, does not bode well for the country as it is under­pinned by pressures that are leading to agricultural asphyxiation, not agricultural transformation. When rural/agricultural transformation is hampered and industri­alisation is slow, with a concurrent rapid population growth, many young people will be pushed into the ranks of the urban unemployed.

Policy Response

Enhanced and better-targeted policy intervention appears to be the key to applying the historical lesson to Uganda to ensure robust and sustained agricul­ture growth and transformation. This approach is given additional urgency by the imminent exploitation of Uganda’s recently discovered oil resources. Oil pro­duction and exports are likely to generate substantial foreign currency inflows into Uganda, leading to the shilling appreci­ating against the dollar and thus make thing country’s exports (including from agriculture) less competitive in the world market.

This so-called Dutch disease would be devastating to Uganda’s already weak agricultural sector and, indeed, calls for expedited reforms even prior to the onset of oil production. In this regard, Uganda needs to follow the best examples of Botswana and Norway, which have effectively managed diamond and oil resources respectively, and protected and expanded diversified economic growth.

Sustained rapid growth in agriculture is key to a robust supply response that will not only provide food security but also moderate domestic prices, even with enhanced food exports to neighbouring countries. If the transformation is sustain­able, it should ensure increasing produc­tivity in the sector to foster the release of labour and profits to fuel an equally sus­tainable industrial transformation.

Increased agricultural supply would obviously need to be fully complemented by the provision of inputs such as fertil­iser, better seeds, training, and herbicides and services, better access to roads, elec­tricity, research, and storage. Storage is in particular important to help stabilise pric­es and give farmers better profits (excess produce would be stored and released to markets gradually, targeting dry spells when prices tend to be high), while ensur­ing that raw materials are available for domestic industries. Currently, sales of maize on the cob to Kenya and South Sudan have inadvertently undermined local production of flour and poultry, fish, and cattle feed.

Policy response to moderate the demand side, namely measures to reduce high pop­ulation growth are necessary now even though benefits are likely to be realised in the medium- to long–term. Lower popu­lation growth will reduce the number of future mouths to feed as well as the num­ber of people to provide services to.

Importantly also, a reduction in popu­lation growth will edge Uganda faster toward the demographic transition — a smaller share of dependent population under 15 and a larger share of the produc­tive population between the ages of 16 and 65. This so-called population dividend has historically played an important role is accelerating the national economic transi­tion from low- to high-income status.

Agricultural/rural sector strategy

A comprehensive and well-co-ordinated approach that can fully tap into the poten­tial synergies critical to a total transforma­tion should embrace a broad definition of agriculture. In addition to food and cash crops, policy should include focus on raw materials to support domestic industry — cotton for textiles, tobacco for cigarettes, coffee and tea for niche export markets, sorghum for beer production. Agricultural policy should address fish­eries (including fish ponds), horticulture, poultry, the dairy and beef industries and forestry (to support lumber, furniture and craft industries), which are all concen­trated in rural areas. In addition, related issues like microfinance, marketing, stor­age, energy, transport and research and training, and extension services should all be mainstreamed into the comprehensive framework.

Measurable outputs and impacts should include food security, rural employment, and income generation, value added, and export strategies. In support of the value added and export strategy, emphasis needs to be put on aggressive marketing strategies to promote increased volumes of exports and identify niche high-value markets.

The related issue of farmer mobilisation —whether through the current SACCOS or new co-operatives—remains critical not only for improved productivity, but also to protect farmers’ interests in markets. The advent of direct regional purchases (by well-connected and funded large middlemen) in Uganda’s villages exposes poor individual farmers to the risk of low prices and food insecurity. Effective col­lective action is thus critical to securing better prices and food security (with limits on sales of food) for farmers—indeed their very survival.

A key intermediate output should be improved training and skills since these are critical to improved technological inputs. Accordingly, there should be a significantly enhanced role for tertiary agriculture and vocational training. In this regard, a best example to adopt would be the historical role of the land grant univer­sities in the US, which were provided land and other resources to spearhead agri­cultural research and training. Uganda should thus give priority to reinvigorating agricultural institutions such as Bukalasa, Busitema, Arapai, Serere, Kawanda, and Makerere University’s Kabanyoro train­ing farm.

Moreover, priority should be given to developing other regional agricultural institutions and giving them land and oth­er resources to spearhead better localised research and training. In addition, col­laboration with donors such as the Gates and Rockefeller Foundations (currently leading the Alliance for a Green Revolu­tion in Africa), the New Rice for Africa NERICA international consortium and the Consultative Group on International Agricultural Research (CGIAR), which recently launched a $170 million global programme to expand maize research in developing countries. Other special­ised agencies like BRAC and the recently launched European Solidarity Financing Fund for Africa (Fefisol) would provide critical know-how in microfinance to sup­port the broader agricultural effort.

Another important intermediate output should be access to finance, most likely via microfinance and small-scale money transfers via cell phones. Bank, venture capital, and other financial sources would obviously be critical to medium-to-large scale agriculture, which is desirable partly because it also complements small-scale agricultural enterprises as demonstration centres and through outgrower’s schemes. Financial inclusion (through provision of credit, deposits, insurance and money transfers) is also a good proxy for access all essential to reducing poverty.

Implementation issues

Key elements of the enhanced strategy already exist in the National Development Plan (NDP), the Plan for Modernisation of Agriculture, various NAADS reviews, and sector strategies in agriculture and other relevant line ministries/departments/insti­tutions. A number of studies and surveys (eg, the forthcoming Uganda Bureau of Statistics comprehensive agricultural sur­vey) will also provide desirable inputs. The new strategy will need additional domestic and external support, perhaps with incremental and better-targeted bud­get and donor resources. In particular, the share of government and private invest­ment in agriculture needs to be urgently augmented to achieve the 10 per cent tar­get of national budgetary resources pro­posed by the 2003 Maputo Declaration on Agriculture and Food Security.

It may be desirable at this stage to set up a national Agricultural Secretariat to co-ordinate the principal stakeholders (the Ministries of Finance, Agriculture, Trade, Transport and Education and the Plan­ning Commission, the Bank of Uganda, Uganda Bureau of Statistics, civil soci­ety, Uganda Investment Authority, and donors) to develop and implement the enhanced agricultural strategy.

Robin D. Kibuka is an independent economic consultant with 32 years’ experience at the IMF. E-mail: robinkibuka@gmail.com