Will discovery of oil help Uganda to industrialise?

By Juma A. Okuku

Social coalitions in terms of strategic collaboration

UMA was established in the early 1960s primarily as a forum to represent the dominant Asian manufacturing interests, but was defunct for much of the 1970s and 1980s. It was revived in 1988 and represents the majority of firms in Uganda’s manufacturing sector. Its objectives are to promote, protect and coordinate the interests of industrialists in Uganda, to act as a watchdog and effective mouthpiece for its members and advise government on key policies affecting industry.

UMA has developed a strong partnership with government in policy designing through dialogue.

The Executive Director, Eng. Hilary Obonyo, noted that the major success of UMA over the last 20 years is that it is now recognised, accepted and respected by government and ‘development partners’ as the voice of the majority of Uganda’s manufacturing sector. No major economic policy is implemented without consulting UMA. Obonyo noted that UMA proposals are not aimed at blanket protectionism of the manufacturing sector:

‘UMA is not an organisation that is waiting for the distribution of unproductive rents. For any manufacturer to be protected, one best protection is to be competitive in three areas: quality, price and quantity. To ensure competitiveness, UMA has a Standards Committee to assist members to produce quality products at competitive rates’.

This positive and competitive attitude by the leadership illustrates the attempt by UMA to transcend the alleged rent-seeking inclinations of business associations.

Obonyo noted several constraints to UMA. First, there is a tendency for the government to involve UMA in policy-making ‘through invitation’. Second, there remains hostility towards the private sector by the civil servants due to the failure to appreciate the private sector contribution to development. Third, the Chairman of UMA, Mr. James Kalibala, notes that corruption in government is stifling the private sector’s efforts to do business with government ‘” the largest buyer of goods and services in the country. He notes:

‘Often, lucrative government tenders are offered to bidders who are not most competent but those with the deepest connection to the public office administering those tenders. Wrong evaluation and awarding of contracts and tenders in government affects the private sectors in doing business with government. This appears to be due to bias and favouritism’.

Behind the apparent harmonious interaction within the industrial class, there is an intense internal struggle to influence the political leaders and get favours, and particularly to get loans from government.

Another major weakness is that government has no clear policy in support of the small and medium enterprises that constitute the majority of UMA membership.

Implications of Oil discovery on industrial policy

The discovery of oil in Uganda should be seen as good news. Some fear it may be a curse rather than a blessing. In the 1950s and 1960s, governments used modest earnings saved from cotton and coffee exports to initiate a modest industrialization programme. This is possibly better achieved with the comparatively higher oil incomes.

What can Uganda do to industrialize?

To successfully industrialize, Uganda will need to craft enduring institutions and a complex political and socio-economic machinery focused on the programme of industrial transformation. Regardless of the type of political system, there must be a government that is focused on the industrial transformation project. The two most important agencies to be constructed are 1) a developmental state 2) an autonomous bureaucracy.

Developmental State

The developmental state should have concentrated sufficient political power, autonomy and capacity to shape, pursue and encourage explicit development objectives. The current Ugandan state has serious deficits in this regard. The form of executive dominance in Uganda is negative dominance.

The 2004 World Bank study of Uganda’s political economy entitled ‘The Political Economy of Uganda: The Art of Managing a Donor-Financed Neo-Patrimonial State’ noted the dominance of patronage by the Executive. It noted, ‘Most fundamentally, the government of Uganda is a regime of personal or ‘neo-patrimonial rule’ ‘” a political system dominated by one individual who maintains his authority through a combination of patronage and selected use of intimidation and forces’. Neo-patrimonialism is incapable of carrying out industrial transformation.

Bureaucracy

Industrial transformation requires a highly capable, coherent bureaucracy, closely connected to but independent of the business community. High quality bureaucracy is based on merit and competitive recruitment with defined career paths. These attributes give it capacity to identify strategic sectors, selectively and strategically use the resources. In addition, it sets performance targets of industry, withdraws support from unsuccessful firms and directs resources from consumption to investment. It should be insulated from rent-seeking pressures.

The current Ugandan bureaucracy, even after the reforms of 1990s, is short of this capacity. The split between the official and the unofficial bureaucracy that has been set in State House must be dissolved to create coherence and concentrate talent. The ethnically driven recruitment for state jobs must be replaced with merit-based and competitive recruitment. There must be insulation of economic and decision-making from various social and political interests. It is such bureaucracy that can carry out successful industrial transformation.

Industrial Policy

Government must institute a coherent industrial policy. Successful industrial policy should be based on a comprehensive and coherent vision of the future of industrial structure of the economy backed by an overall bureaucratic coherence. Government must target and leverage firms to enhance their competitiveness and productivity.

The industrialization strategy to be followed should be import substitution (ISI) before embarking on exports. ISI must be seen as a precondition for successful export-led growth. Successful exporters were countries in which import substitution was relatively successful in building up an industrial structure that was not merely limited to local production.

Financing Industrialization

The capacity to mobilize, control and direct finances to industry or to development in general, defines a developmental state. The state shall have to establish critical financial institutions to provide development finance. No country has industrialized without control over the financial infrastructure. By the end of 2004, the majority of Uganda’s banks were foreign-owned and controlled 87% of the total assets. The unstrategic privatization and liberalization of financial institutions has restored the grip that foreign interests had on the direction of the Ugandan economy prior to independence. The financial institutions created should be autonomous centres of power outside the network of patronage.

Coordination agencies

Numerous specialized agencies have been created as a result of reforms: Uganda Investment Authority (UIA), Uganda Revenue Authority (URA), Uganda National Council of Science and Technology (UNCST), The Uganda Export Promotion Board (UEPB), must be reorganized to enable them to have a focused objective of industrial transformation. The proliferation of institutions has not necessarily led to efficient policy formulation and implementation.

Technology Transfer

Countries intending to catch-up with the developed world must learn technology and construct national systems of technological acquisition. Technology imports, combined with local activities and pro-active interventionist policies, will foster strategic ‘infant’ industries. Uganda shall have to revamp the existing research institutions of science and technology to enable them to bring in foreign technology, assist in commercialization of these technologies, create a climate for Research and Development (R&D), import, assimilate, and disseminate technologies. This should be in close collaboration with local firms.

Revival of UDC

Those advocating for the revival of Uganda Development Corporation (UDC) must take note of a number of considerations. 1) changed global context and 2) the shortcomings of UDC as an industrial agency. UDC was not built as an agent of transformation of the Ugandan economy. It was part of the colonial strategy of neo-dependence through joint state and British ventures in ISI. ISI was a British supplied and Uganda financed infrastructure development strategy. UDC was a highly bureaucratized answer to the problem of transferring technology to an underdeveloped environment of Uganda. It did very little to stimulate indigenous entrepreneurship or to find truly autonomous solutions to the problem of raising the level of local economic activity.

The main beneficiaries of UDC operations were foreign investors. This is because the foreign capital interests that set up industries behind the tariff walls were determining the direction of investments, the methods of production and types of technology.

UDC subsidiaries neither created new capacities nor were they undertaken with linkages for the future development of their sources of raw materials, safe for the textile industry. This created an economy with little forward and backward linkages due to failure to stimulate indigenous technical knowledge and consumption of local raw materials.

Agrarian reforms

Uganda must carry out a comprehensive land reform. Equitable distribution and definition of property rights in land with resource support from the government could have positive results and support industrialization. Reform could increase agricultural productivity by improving farm technology, human capital formation through education of farm children and equitably distributing income. This could create room for the modernization of agriculture and the expansion of internal market.

Social alliances

The Ugandan state should build a concrete set of connections that intimately link the state to particular social groups with whom the state shares a joint project of transformation. These social ties bind the state to society and provide institutionalized channels for the continued negotiation and re-negotiation of goals and policies. It implies much denser and more intimate ties between bureaucrats and society. The business class should be seen as allies in the industrial transformation project and not as ‘cash cows’ to fund electoral programmes of the ruling party. To successfully industrialize, Uganda will need more than the reliance on ‘free’ markets as IMF and the World Bank suggest. Development of a country like Uganda demands more than free markets. Alexander Gerschenkron, the Russian economic historian noted: ‘To break through the barriers of stagnation in a backward country, to ignite the imaginations of men, and to place their energies in the service of economic development a stronger ‘medicine’ is needed than the promise of a better allocation of resources or even lower price of bread’. Given the experiences of earlier successful industrialisers, that ‘medicine’ may be economic nationalism – the belief in the use of state power to politically construct the competitive advantage of the national economy. Industrialization shall be better buttressed by developing local capacities.

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E-mail: jaokuku@yahoo.co.uk

The author is a lecturer in Political Economy, Makerere University.