Time for economic pragmatism

By David Nyende

Infrastructure investments alone will not result in economic growth and development

In answer to the question: “How do you make an economy grow?”, one economist wrote: “The secret of economic growth remains mysterious despite the tremendous efforts by economists into trying to solve it: neither free market nor protectionism is an unquestionable guarantor of economic growth”

In the 2015/16 budget, the government of Uganda made deliberate and commendable commitment to finance NDPII infrastructure investment projects in energy (dams, transmission lines, etc), transport (roads, railways, bridges, etc) and ICT. The hymn has since been: invest in infrastructure and economic growth will follow flawlessly. Unfortunately this is only half the story; things are more complex than that. If we do not go further with other policy tool interventions, we shall find ourselves worse off (in untenable indebtedness) than before.

Investments in infrastructure development are the beginning of a long journey in that, as a start, it demonstrates the recognition by government that in matters of the country’s strategic and sustainable development and the buck stops with it. Secondly, the private sector is wont to shun investing in gigantic projects that require massive expenditure outlay with the concomitant unpredictable gestation periods before returns are realised. The private sector’s preference, especially in emerging economies, is service industry where returns are faster. In such circumstances, therefore, the state must be the investor of default in infrastructure.

The second essential outcome from such gargantuan long-term investment projects is massive employment generation whose multiplier effect is what distinguishes well planned holistic investments from those conceived through blind copy-catting.

Employment creation puts disposable income in the pockets of workers who must spend it on goods and services, thereby spurring demand.  This demand triggers investments in manufacturing in the form of machinery procurements and human resource skilling or capability building. This secondary wave of investments creates more jobs and so the cycle continues.

It is this thinking that led the U.S. government in 1933, during the great depression, to form the Tennessee Valley Authority (TVA), a gigantic corporation to provide navigation, flood control, electricity transmission, fertiliser manufacturing, and a multitude of other industries.

Where things go wrong, is when the secondary investment phase does not occur and instead the goods and services are imported. The immediate problem is a current account deficit which will eventually lead to shilling depreciation pressures, high interest rates, too much money, unemployment, and general sluggishness of the economy.

So what’s the way forward? The government has made pledges to provide a favourable climate for industrialisation in the form of operationalising, developing and equipping the industrial parks and EPZs with transport and utilities infrastructures (2015/16 Budget Speech). This is laudable but not enough to directly spur industrialisation.

Industry needs affordable credit. Focus should therefore be to either adequately capitalise the Uganda Development Bank in readiness for this role or set up a special fund for the job. We should not be shy at creating government owned companies (GOCs) if pragmatism so dictates. We should not be slaves of ideologies if they are inappropriate in certain circumstances.

A good example of pragmatism rather than blind ideology pursuit was the 2009 U.S. Recovery Act or Stimulus Package to rescue banks (and the giant AIG) rather than let them collapse as would have been the case in a free market. In this context, therefore, the Uganda Development Corporation (UDC) should be adequately capitalised and strengthened to provide oversight for the effective and efficient management of GOCs.  It should be staffed with professionals in management, finance, business, legal and other such business skills to constantly monitor and evaluate the performance of GOCs. These companies should be run like any other well managed world class private sector entity. They should not be overly protected but closely supervised; they should be allowed to fail if poorly performing but not on flimsy grounds.

The bias towards manufacturing as opposed to other wealth creating avenues like services (tourism, banking, IT, etc), agriculture, and natural resources is because manufacturing presents the highest productivity essential for sustained economic take-off and growth. The majority of services have low productivity and in any case they derive their existence from demand originated by manufacturing which explains why no country has developed solely on the basis of services. Agricultural produce can be eroded by technology coming up with synthetic alternatives or disappear through over-exploitation (forestry, fish, etc) while natural resources (oil, minerals, etc.) are finite i.e. they can run out.

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David Nyende is the principal partner at Continental Partners; a firm of certified public accountants in Kampala