Economic growth Vs development

THE LAST WORD: By Andrew M. Mwenda

Don’t judge Uganda by where it is but by the speed at which it is growing

I have been arguing that Uganda’s economy has been growing at an impressive rate over the last 30 years. Many readers have written to me saying that although we are growing economically, we are not developing. This shows a misunderstanding of the relationship between growth and development. Economic growth refers to a quantitative increase in the goods and services produced within an economy in a given period of time. Development is a qualitative increase in the same.

For a country to develop, it has to grow over a very long period of time. Economic growth is, therefore, the mother of economic development. No country can develop without sustaining economic growth over decades. And no country can sustain economic growth for decades and does not develop. This is because growth over the long run is only possible by changes in technology and in the mode of organisation. Therefore, long run growth fosters structural change i.e. development.

How does our country fit in this story? We cannot judge Uganda by where it is but by the speed at which it is growing towards a particular level of per capita income. Even with all its weaknesses, GDP per capita remains the best proxy to measure the wellbeing of a country. Per capita income gives us an idea of potential per capita revenue, which in turn gives us an idea of per capita spending. How much a government spends per person has powerful implications on its ability to provide a large basket of public goods and services to its citizens in order to improve their wellbeing.

Over the last 30 years of President Yoweri Museveni’s rule, Uganda’s growth has averaged 6.74% per year, making it the 17^th fastest growing economy in the world, the 4^th fastest in Africa out of 189 countries on the IMF list. When you remove mineral rich countries from the sample (because they are enjoying God’s or nature’s bounty), Uganda is the 10^th fastest growing economy in the world, first in Africa.

But why is our country still poor with a per capita income of $670 in nominal dollars (depending on the exchange rate) and $2003 at purchasing power parity? The best explanation can be found in what economists and statisticians call “The Rule of 72.” It states that if anything under measurement grows at an annual rate of 1%, it would double every 72 years. But if anything grew at an annual rate of 7%, it would double every 10 years. Now 7% is about the fastest rate of GDP growth any country has registered over a long period of time, 25 years.

This means it takes very long to realise fundamental differences (structural transformation) when you begin from a very low base. Imagine a country that begins at a per capita income of $150 today and grows at the supersonic speed of 7% per year. In the first ten years, it will reach $300, in 20 years $600, in 30 years $1,200. There isn’t a fundamental difference between a country with a per capita income of $300 and that of $1,200. They would all still be regarded as poor. Yet sustaining high rates of GDP growth, leave alone per capita income growth, over the long term is very difficult.