Bad news for Uganda economy

And the secret formula needed to accelerate GDP growth

Kampala, Uganda | THE INDEPENDENT | Uganda’s economy is likely to grow by 6.5%, according to central bank governor Emmanuel Tumusiime Mutebile. That would be about 12% higher than last year and the highest rate in years. But there is a problem; the record high growth rate could be a one-off.

According to recent report by the American management consultancy firm, Mckinsey Global Institute, Uganda’s economy grows consistently but slowly.

That is a problem because the consistent but slow growth means Uganda cannot achieve upper middle-income status over a 50-period as it cannot achieve the necessary average 3.5% real annual per capita growth rate, the report says. The 3.5% growth rate is the required average growth rate required to jump to another economic stage; according to the World Bank. In the case of Uganda, that is what is needed to become a middle-income economy.

McKinsey calls economies that make the jump successfully “outperformers. In a recent report titled `Outperformers: High-growth emerging economies and the companies that propel them’; McKinsey points at two factors that are needed to sustained high economic growth among emerging economies – and Uganda lacks both of them. The two factors are: first, government actions that encourage higher productivity, income, and demand. And the second is the presence in the local economy of large, ambitious, and globally competitive companies.

These can be further subdivided into seven indicators of GDP growth, namely; government effectiveness, domestic saving, innovation, capital size of listed companies, performance of export sector, and global connectedness. These determine whether an economy will perform or not. And Uganda performs poorly on all parameters.

Uganda’s best score is 9% on exports and 8% on domestic savings. Rwanda scores higher than Uganda on exports at 14%. But the highest scorer on exports is Zambia at 18%, followed by Cambodia at 16%. China, Mozambique, and Vietnam are level with Rwanda at 14%. These countries have a high engagement with the global economy through inflows and outflows of goods, services, finance, people, and data.

The exports ranking takes into account the size of each flow for a country relative to its GDP or population and its share of each total global flow. The best performing economies are those that have benefited from tapping into global demand growth through export markets, giving them greater economies of scale.

Rwanda and Tanzania beat Uganda on the domestic savings scale. They score 14%. But Uganda is better than Kenya and South Africa. It is Azerbaijan at 19%, however, which has the highest domestic saving, followed by Cambodia and Turkmenistan at 16%, and Rwanda and Tanzania at 14%. Kenya and South Africa are at 3%, Nigeria 6%, Ethiopia 4% and China 10%.

Uganda’s worst score is -8% on innovation which is based on an assessment of movement in 80 fields, such as politics, education, infrastructure, and business sophistication. Rwanda scored 13% and Iran led the field at 19% followed by Mozambique at 18%. Tanzania scored 7% and Kenya 10%.

Rwanda is the world’s most effective government with a score of 93%. The ranking is based on the World Bank’s Government Effective Score which measures the perceived quality of public services, civil service, and policy formulation and implementation. Serbia is second to Rwanda at 81%, Kazakhstan 58%, and Azerbaijan 48%. China’s government is 33% effective, Ethiopia 44%, Ghana -35%, Tanzania 8%, Uganda 7%, and Kenya 10%.

China leads the globe in GDP growth. Azerbaijanis are the top savers. Mozambique leads in innovation. Bulgaria has the highest market cap of listed companies. Cambodia has the most exports. Singapore is the world’s most connected economy outside of the advanced work.

In the report, Uganda is grouped together with 41 other economies that managed a compound annual growth rate between 0.95% and 3.5% over the period 1965–2016. This is the biggest cohort of the 71 countries studied. These are called the `middlers’ and Uganda belongs to a group labeled `consistent growers’ together with Tanzania. Ethiopia is the best performing economy in Africa and is ranked among “recent outperformers”. Rwanda is among the top nine best performing economies among the middlers. These so-called “recent accelerators” include Mozambique and Ghana from Africa and Sri Lanka, Poland, and the Philippines.

Manufacturing matters

To grade the countries, the McKinsey researchers started with a list of 218 economies tracked by the World Bank, then excluded 99 countries with fewer than five million people in 2016, a further 28 countries because of a lack of data, and 20 high-income countries. That left 71 which were further divided into four cohorts: Long-term outperformers, recent outperformers, middlers, and under performers.

From the report, it appears the best spot to be are the recent outperformers. These 11 countries hit the threshold of 5% compound annual growth rate derived from an average growth rate of 5.4% required by low (3.7%) and lower middle (7.1%) income to move up one income level over a 20-year period (from low to lower middle or lower middle to upper middle). Ethiopia is the only country in this cohort. Others include India, Vietnam, Cambodia and more.