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Leapfrogging into middle income status

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Added 12th August 2016 10:22 AM

Economists tell us that movement of labour to urban areas is an important first step in transforming an agriculture-based economy.

Leapfrogging into middle income status

Economists tell us that movement of labour to urban areas is an important first step in transforming an agriculture-based economy.

By Grace Akello

Structural transformation

This is a follow up article on Africa's demographic transition published in the New Vision of August 5, 2016.

It adds on the debate on how Uganda is to attain middle-income status following President Yoweri Museveni's specific reference to industrialisation as the pathway to Uganda's economic growth in his recent State of the Nation address.

Some of the key processes in getting Uganda on a firm path to economic growth in order to attain middle-income status  in the next 10 or so years were debated, within the broader context of African countries, in the Organisation of Economic  Development publication Africa Outlook 2015.  Outlook refers to three issues which are a relevant backdrop to our own ongoing debate namely; the demographic transition, structural transformation and spatial balancing.

Economists tell us that movement of labour to urban areas is an important first step in transforming an agriculture-based economy. The young people leave rural areas for urban centres and get jobs in manufacturing firms.

In the meantime, those who remain in agriculture produce food and other products demanded by the new urban labour force. In turn, the new manufacturing sector produces goods which are demanded by those engaged in agriculture in rural areas.

Through these exchanges, the economy begins to grow and is slowly transformed; with modern agricultural technologies making fewer and fewer workers to remain in agriculture and more and more of young people from rural areas to go to urban areas where they get jobs in the expanding manufacturing sector.

This ideal picture is sadly only a textbook case in many African economies. According to the Organisation for Economic Co-operation and Development (OECD) Africa Outlook Report of 2015, "19 million youths in Sub-Saharan Africa (SSA) and four million in North Africa" joined the labour market in 2015.  By 2030, "370 million [in SSA] and 65 million [in North Africa]" are estimated to join the labour force. There is rural-urban migration by "young mobile males who are more educated than the average rural residents...taking away labour force from activities in the local economies where they are often needed, such as physical labour in farming".

On the other hand, there are hardly any jobs openings in the manufacturing sectors in many of Africa's urban areas. As the OECD report points out, in "most African countries….urbanisation has occurred without industrialisation".

Industrialisation on the continent was curtailed by the Structural Adjustment Programmes (SAPs) climate of the 1980s and 1990s in many African countries, causing the manufacturing sector to grind to a standstill except for a few cases. In a number of countries, state-led industrialisation was deliberately rolled back by the same climate through the much vaunted exercise of privatisation. Prior to SAPs, a number of countries had pursued a policy of industrialisation, with varying degrees of success, but at least it provided room for labour in urban areas.

The mantra of the SAPs was that the Government should get out of the economy and leave it all to the private sector. The question is which private sector would cause industrialisation in Africa to the extent of creating jobs for her youth?

For most of SSA, at the time, the private sector as with the rest of the continent was not in a position to start and grow the manufacturing sub-sector of the economy.

This home-grown private sector was only in the making; highly constrained in its operations by lack of financial, technological and even human capital. Foreign capital was hesitant to invest in Africa with its advisers constantly downgrading African economies as high-risk investment destinations.

Moreover, due to the challenges of state-building, whatever foreign capital there was on the continent took flight. Once fled, getting it back to Africa was a monumental task.

Western agencies and analysts painted a very grim picture of the continent which had the effect of discouraging capital investment return to Africa. Such foreign capital investment as there was targeted a few countries: increasing portfolios only in a handful of African economies in which it had confidence. Where it stayed on the continent, foreign capital chose to invest in extractive industries, such as mining, located in specific geographical areas and employing only a fraction of the available labour in the market. It is only recently that we have seen the emergence of the service sector; promising employment opportunities for the youth and pointing to diversification of African economies from their strong base on raw materials export. Otherwise, for the African private sector, the best it could do for the economy was to continue the export of the continent's raw resources.

It could not do otherwise because there was very little of an endogenous private sector, typified by a self-motivated entrepreneurial cadre with knowledge and capital to set up medium or large-scale manufacturing firms. In many African countries, such private sector as existed, was itself in need of being set up and built.

The price that Africa paid for the foreign capital in the form of loans that she badly needed in the 1980s and 1990s, was to give her economies to the hands of those who lent her money. These moneylenders assured the continent that African economies were safe in their hands; if only African governments did as they were told. For some time, therefore, the sacred text of SAPs reigned on the African continent. It blinded her to taking live and fruitful examples from countries, which pulled themselves up by the bootstraps such as Italy after the Second World War and more recently China; especially the successes of the latter's experiences with special economic zones.

Apart from the existence of a large manufacturing sector, heavily reliant on capital and technology injections, Italy's real economic strength and resilience lies in the small family firm merging with other small family firms to become co-operatives. Many sectors of the Italian economy are in the hands of a co-operative: from corner shops, to agricultural firms, to manufacturing firms to banks. Bank co-operatives target their financing: some are specialised banks for a trade, others specialised for a geographical area such as a province or a region. Others simply target workers in all trades etc. Today, there are 367 co-operative banks in Italy each running as a co-operative but belonging to a larger parent co-operative group bank, under regulation by the Bank of Italy. Among these are the giants of Italian banking: Unicredit and Intesa Sanpaolo.

Both banking groups had their beginnings as co-operative banks with Unicredit merging with regional co-operative banks to become a group bank, which today offers investment banking services beyond Italy: in London, Hong Kong, New York etc. Intesa Sanpaolo, with market capitalisation of Euro33b, besides providing credit in Italy, is one of the European Union's (EU's) top banks. Co-operative banks in Italy are themselves driven by the mutual support and assistance, which motivated their formation and enabled them to fund many different activities of co-operatives within the Italian economy. These are very important lessons on financing and diversification of the economy that Uganda could learn from Italy.

Uganda is ideally suited for co-operatives which can enable her structurally transform and  diversify her economy on different fronts. For example, within the key area of agriculture Uganda, using the Italian model, could rapidly transform from low-tech smallholder agriculture to a thriving agricultural sector with technological support and mechanisation along many of its value chains. Although there may be some few differences in farm size between Uganda and Italy, Italian farmers operate essentially as smallholder farmers. A farm-holding in Italy can be as small as Uganda's one to five-hectare farms. But they are highly mechanised and take advantage of new agro-production technologies many of which are not outside the reach of Ugandan farmers. Another difference between the two farmers is that while the Ugandan farmer will sell his/her produce as raw material, very few Italian farmers would do this. If they do so, then it is because they have a niche in the market as a specialist supplier. Unlike Ugandan farmers, most of who are subsistence farmers, Italian farmers are into agribusiness: they produce for the market. Their farm is an economic firm which must make profit on which the farmer lives. Unlike Uganda farmers whose agro-processing is separated from the farm, many Italian farmers carry out within-the-farm agro-processing. For example, a wheat farmer will grow, harvest, clean, pack and brand his/her wheat on the farm, thanks to mechanisation of agriculture. These are some of the elements which go into the structural transformation of agriculture. They could form the basis for development co-operation between Uganda and Italy.

It is not an exaggeration to say that the Italian model's strength lies in its family firm and co-operatives roots. Cooperatives run many sectors of the economy including agriculture, with 14,617 co-operatives accounting for over 62% of business revenue in that sector. Italy's food processing as well as her manufacturing sector are run by over 10,000 co-operatives while over 25,000 co-operatives operate in the construction sector; over 10,000 in the transport and some 14,000 provide business services. In Italy's food basket, the region of Emilia Romagna, one third of the gross domestic product is from co-operative undertakings. Belief in the family firm and commitment to one's local co-operative's success and survival, is what makes the Italian economy grow and stay resilient through difficult times. But this commitment is buttressed by the availability of cheap credit for different enterprises and their value chains. That is where a big gap exists between Ugandan and Italian farmers.

Moving away from Italy, we point to another prototype approach to economic growth in China. Faced with the challenges of economic growth and employment opportunities for her youth, China took the UN International Labour Organisation (ILO) script of enterprise zones and re-wrote it to suit her own economic growth and development challenges. Not only did China face the challenge of transforming her agricultural economy, she had the highly explosive problem of unemployed youth who could be manipulated against the state. To resolve both challenges, China conceived national development zones which took a number of names and forms including Special Economic Zones (SEZs), Export Processing Zones (EPZs), Industrial Parks (IPs), Investment Zones (IZs) etc. These zones were a deliberate national industrialisation policy by the state: bringing together the three critical economic growth elements of capital, labour and technology.  Chinese economic zones led to the absorption of the country's huge surplus labour by domesticating foreign investment whilst assuring domestic and external markets for foreign investors. Furthermore, the question of balanced economic growth was neatly resolved by the spatial distribution of these zones.

A country like Uganda, for example, could take a leaf from China; which has tethered foreign capital and technology to produce goods for external markets in China's various regions. In doing this, she has successfully transformed her economy, reduced unemployment among volatile youth and increased her export earnings from the various economic zones. Uganda  has a number of external markets waiting for her to produce goods: for example the African Growth Opportunity Act (AGOA) of the US, Everything But Arms (EBA) of European Union, the special China-Uganda trading arrangement, etc.

However, unlike China which utilised special economic zones to industrialise and absorb its youthful labour force, Uganda, as most of Africa, remains trapped in smallholder agriculture. Today many of the youth who flee peasant agriculture for urban areas, run from one end of hardship to another. Once in urban areas they end up joining the informal economy. Others simply live hand-to-mouth, depending on casual labour, with no regular employment prospects in sight.

The writer is Uganda's ambassador to Rome


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