Uganda’s economic growth dilemma

Why our country remains poor with high unemployment in spite of 28 years of huge expansion in GDP

Last week, I spent an entire day at Uganda Bureau of Statistics crunching numbers with the staff on our GPD growth between 1986 and 2014. There is only one route for nations to grow rich: sustained economic growth over a very long period of time. Economics and statisticians use “The Rule of 72”. It states that if an economy (or anything under measurement for that matter) grew at 1% per year, it would double every 72 years. However, if anything grew at 7% per year, it would double every ten years.

Now 7% is about the fastest rate of growth any country has sustained over a generation (25 years). In his book, The Next Convergence, the Nobel laureate in economics, Michael Spence, found that between 1950 and 2005 only 13 countries in the world sustained an annual average rate of growth in GDP of 7% and above for 25 years. Uganda’s growth rate between 1986 and 2014 (28 years) is 6.74%, making it the 12^th fastest growing economy in the world.

Our nominal GDP grew nine times from $3.02 billion to $27 billion (at constant 2010 prices) between 1986 and 2014. Nominal per capita income grew at an average rate of 3.46% from $204 to $780 over the same period. We would have performed much better in per capital income growth if it were not for a very high rate of population growth. Note: in calculating per capita income growth, you subtract the denominator (the rate of population growth) from the numerator (rate of GDP growth).

In 1986, Uganda had a population of 14.7 million people. In 2014, it had reached 34.6 million. If you calculate backwards, you get a population growth rate of 3.28%. Average GDP growth of 3.46% over 28 years is an impressive performance by global and historical standards. Per capita income in USA is 10^th highest in the world because it grew at an annual average rate of 2% between 1900 and 2000.

Some economists claim that a poor country growing faster than a rich one is expected because it would be beginning from a low base. If you have only one house and add another one, you have grown by 100%. But if someone has 1,000 houses and they add 100, they have grown by only 10%. Surely, this argument goes, the guy who has built 100 houses has done a better job than one who has built one.

If the argument above were true we would be witnessing income convergence between rich and poor countries. Yet from 1965 and 1995, average per capita income in Africa (in Purchasing Power Parity – PPP) fell from 14% of that of OECD countries to a mere 7%; Latin America, fell from 36% to 25%. Only East Asia improved against OECD incomes from 18% to 66%. Taking a longer-term, Harvard University professor, Lant Pritchette, found that over the 120 years (1870 to 1990) incomes in poor countries fell behind those of rich countries – both proportionately and absolutely i.e. the ratio of per capita income between richest and poorest countries increased by a factor of five.

The point is that poor countries find it difficult to grow as fast as rich countries perhaps because they are held back by a series of what Oxford economics professor, Paul Collier, has called “traps” – violent conflict, poor governance, resource curses etc. So the main tendency has been towards income divergence where the rich are growing richer and the poor poorer. East Asian countries plus Mauritius and Botswana have been an exception.

The decision by Uganda to let the market drive growth but leave out the state as a transformative agent, could be the reason majority of Ugandan citizens remain poor in spite of high per capita income growth in the last 25 years.

Uganda alongside other African countries like Rwanda, Ethiopia, Tanzania and Mozambique, has enjoyed good per capita income growth over the last two and a half decades. In spite of this our country remains poor and many of its people are impoverished. Indeed, 28 years later, 79% of our people are still living in rural areas, 68% of whom as subsistence (hand-to-mouth) farmers.

So why has our high rate of growth not fostered the kind of structural transformation that lies at the heart of development?

Partly, it could be that Uganda’s growth strategy has privileged the market and ignored the role of the state as a transformative agent in a poor country. Free markets have allowed us to achieve short-term allocative efficiency. For example, we have a large semi-literate peasantry with skills in traditional cultivation. Hence in international trade we have specialised in producing and exporting those products where our peasants’ skills give us comparative advantage – raw agricultural produce. But this also means we have specialised in being poor.

Agriculture has suffered sluggish growth – averaging 2.9% over 28 years. The market has not transformed our peasants into Schumpeterian entrepreneurs using modern farming techniques.  Thus our growth has been driven largely by services. Yet services create a small number of high paying jobs and a moderately large number of low paying jobs. It therefore tends to concentrate income at the top without actually fostering structural transformation. Only manufacturing creates large-scale low-skill jobs. Uganda’s manufacturing has grown at an annual average rate of about 5% over the last 28 years compared to services at about 20%.

Countries that have transformed did so through manufacturing. All of them invested heavily in big infrastructure projects, which Uganda is now doing with roads, railways and dams. But that was the easier part. The more complicated part was nurturing a strong indigenous entrepreneurial class. They did this by extending cash grants, subsidies, cheap long-term loans, tax holidays, etc. to private enterprise.

Now such industrial strategy comes with costs and risks. Governments will never place resources in the hands of real or potential opponents. President Yoweri Museveni will not extend cheap long-term loans, subsidies, cash grants and tax holidays to companies owned by Ingrid Turinawe, Kizza Besigye and Erias Lukwago, regardless of their business acumen. Equally President Kizza Besigye would not do such a thing for Salim Saleh and Sam Kutesa.

Once you accept industrial policy, prepare for political favoritism. The question is: can our politics accommodate it? Many poor countries attempted such industrial policies. In East Asia, they succeeded while many countries in Africa and Latin America did the same and failed. The failure did not result from the design of policy but rather from the ensuing political contestations stimulated by such allocative disputes – why did John get the cheap loans and subsidies and not Derrick. Finally, you would need to throw vast sums of public money at hundreds of budding entrepreneurs to get a few successful ones. And that is politically difficult to sell in Uganda.