Aerial View of Kampala, there are not enough locally owned large enterprises
In 1944, delegates from 44 countries met at Bretton Woods in the United States to discuss the future of the world economy after the devastation of WWII. The World Bank (WB) and International Monetary Fund (IMF) were borne of this summit to do two things: aid development and bail out nations in financial trouble. Fast forward half a century later to 1990, John Williamson, an international economist, formulates the term the Washington Consensus in reference to free market policy reforms suggested by the IMF and WB. Troubled countries would receive bailouts in exchange for fiscal discipline, tax reforms, interest rate liberalization, floating their exchange rate, trade liberalization, and privatization. Uganda, like most Sub-Saharan African countries, was not left out of this intervention.
By the end of the civil war in 1986, Uganda’s economy had virtually collapsed. Annual headline inflation was at 240%, the economy almost completely depended on agriculture (mostly coffee) which contributed to 50% of tax revenues and 90% of export earnings, and the private sector contributed only 9% to GDP. The new NRM government first proposed economic programs involving high levels of government control and regulation. However, by December 1987, exports were falling relative to imports, inflation was at 147%, and the effective exchange rate had increased by 128%. It thus succumbed to the Economic Reform Program of 1987.
What Worked?
Liberalisation of the foreign exchange market increased access to foreign currency and a devalued shilling made Ugandan exports cheaper on the international market. Divestiture of public enterprises in favour of privatization (75 entities privatized and 31 liquidated) boosted tax contributions from the private sector. Thereafter, GDP growth in Uganda averaged 7% for 20 years and GDP has quadrupled from just over US$6 billion to US$26.3 billion as of 2015. In addition, headline inflation dropped significantly and has averaged 5% over the last 20 years, the number of individuals living below the poverty line declined from 56% in 1992 to 19.7% in 2013, and foreign Direct Investment (FDI) flows increased, making Uganda one of the top ten recipients in Africa; the country has attracted an average of US$250 – 300 million annually over the past five years.
Why are Ugandans still so poor?
Liberalisation does not have a wealth redistribution mechanism. Unregulated markets allocate resources to the most profitable sectors without necessarily achieving the desired social outcomes. “Prosperity for All”, a phrase often used by the president, but coined in 1948 by then West German Minister for Economics, Ludwig Erhard, cannot be accomplished if the government abrogates its duties of social service delivery and ignores sectors like health, education, and public transportation.
With free trade market policies in place, Uganda has over 2,300 exporting firms but the majority are foreign owned. As a result, most of the profits are repatriated, there is no local ownership of resources, and new technologies are hardly transferred to boost productive capacity. Low productivity has contributed to poor export performance with exports making up only about 10% of GDP in 2014 and jobs are not growing fast enough to match the high population growth rate. As of 2014, Uganda had the highest rate of youth unemployment in Africa. Moreover, the sector that employs the largest percentage (66%) of Ugandans, agriculture, has not thrived, as farmers have been unable to cope with the competitive environment.
This has left majority of Ugandans in a poverty trap. Greater access to credit markets has increased external borrowing but at high interest rates. Coupled with fiscal indiscipline and a low capacity to absorb the borrowed funds or allocate them to intended projects, the debt to GDP ratio is steadily growing, standing at 30.2% in 2014. Liberalisation of the banking sector has not significantly improved financial deepening. At least 87% of the banks are foreign owned and charge the highest interest rates in the East African Community. As of 2013, more than 70% of Ugandans were not included in formal financial institutions.
The state has not really slimmed down; roles that once belonged to ministries were simply transferred to parallel government agencies propped by donor funding such as the Rural Electrification Agency and National Agricultural Advisory Services. Service delivery was thus duplicated without improvement in outcomes. Moreover, political power has been excessively decentralized; there are currently 112 districts and 146 counties in Uganda. This has bloated the public sector bill at the detriment of development expenditure and aggravated rent seeking and corruption which cause losses of UGX. 500 – 700 billion annually.
How Can Liberalisation Work for Uganda?
Though private sector led growth is undeniably necessary for economic transformation, it is hardly sufficient. The state plays an important role in clearing market failures; as evidenced by the 1929 and 2008 financial crises. However, the state’s institutional mechanisms need to be robust enough to facilitate this. A well-institutionalized state not only delivers social services, but can even be an engine of innovation. Major historical developments have come about as a result of government involvement in technological advancement. For example, the space race between Russia and the USA resulted in the development of technologies that led to the creation of Microsoft, the GPS, and the Internet.
In Uganda, there are not enough locally owned large enterprises. Citizens can be protected either by levying heavy taxes on the profits of foreign enterprises or ensuring a percentage of local ownership in foreign owned companies. This is why countries like France and Germany still have large national enterprises and Norway charges up to 78% on profits of oil and gas companies. In Thailand, with an investment US$ 4 million, you may own only 40% of the enterprise. Other solutions could entail putting restrictions on capital and financial flows to stabilize the exchange rate, providing easily accessible credit to farmers and nascent industries, and setting up more Public Private Partnerships to improve service delivery.