Understanding Uganda's low productivity-low economic growth trap and the way forward

Ibrahim M. Okumu

Uganda's expected economic growth rate of 3.5% for the Financial Year (FY) 2016/17 does not augur well for an economy that seeks to escape the low income and low economic development trap.

Only if this was a blip; however, economic growth has averaged 4.5% for the period FY 2011/12 and FY 2015/16 suggesting that the 3.5% growth this FY is not a one off, but rather potentially an indication of an economy caught up in a low productivity and low economic growth trap. The low productivity and low economic growth trap is a concern because our population growth rate is just about 3% implying that for economic growth to drop as a low as 3.5% suggests that in FY 2016/17 net economic growth is actually 0.5%.

Besides, given our huge appetite for debt financed public investment, the low economic growth and low productivity trap dampens the sentiment of lenders towards our economy as a credit destination at favourable terms as low economic growth given the low tax base implies low revenue collection which precipitates debt repayment risks. Also, inherently the low economic growth implies that our economy is not creating enough jobs increasing the risks associated with unemployed youths.

The essence of this write up is to understand why the low economic growth and low productivity trap and suggest potential ways forward.

In an attempt to induce productivity growth, the Government embarked on infrastructural development since FY 2011/12 as a way of reducing the cost of doing business.

However, because of inadvertent actions, even with the completion of some of the projects, for example, Bujagali Hydro Power Dam, the cost of electricity has remained rather unfriendly to the manufacturing sector let alone households.

Besides the sluggishness associated with the construction of the infrastructure projects implies delayed productivity gains.

This speaks to perhaps enhancing the efficiency with which public projects are adopted and implemented. Furthermore a bird's eye view of the contractual arrangements and potential pricing of the services is paramount.

While gains from infrastructural investments accrue upon completion; in the immediate, the fact that both contractors and technical staff are typically foreign to Uganda, implies that the biggest fraction of the infrastructure spending stays out of our economy thus weakening the within country multiplier effects of the ongoing infrastructure investments.

As had the infrastructure spending been internalised then, these funds (exclusive of spending on equipment and other construction materials) would have supported consumption and investment locally.

Going forward, therefore, it could be paramount to embrace local contractors and allow for learning by doing to take course as this would not only grow the ability of local companies to undertake massive infrastructure investments but also allow for multiplier effects of such investments being felt within our economy in the immediate.

Besides the inability of fiscal spending to kick start the economy, we seemingly have a fatigued labourforce irrespective of whether skilled or not, we have increasingly turned into a deals society which has distorted the reward mechanism. As such, professionals prefer not to engage in their line of work, but engage in rent seeking activities as the payoff could be higher than practicing as say a lawyer or even an engineer.

This misallocation of human resources in turn hurts the economy's productivity of course not to mention public education investment losses associated with training such persons. Perhaps taming rent seeking while offering competitive wages could be ideal although the penalty mechanism for engaging in corrupt activities ought to be strengthened.

Furthermore, there is perhaps a need for Ugandans to be cognizant of the fact that wherever they are working, they are contributing to the wellbeing of others and to the prosperity of Uganda's economy.

For instance, it is not by coincidence that traders are jittery about the Asian traders down town with complaints being aimed at the Ministry of Trade Industry and Co-operatives.

These Asians certainly got permits as investors, but ended up engaging in petty trade, which the local traders deem an entitlement by virtue of being excluded from an unforgiving labour market.

However, with Asian competition the locals are likely not to survive the heat hence being rendered unproductive or unemployed. Remember, however, the initial shock started with the issuance of a junk investor permit.

Furthermore, it is embarrassing for us to hold up to the notion that we are an agricultural driven economy. This is especially so as we have failed to effectively manage the value chain from agriculture research to farm inputs to farm management and connection of farm output to markets.

As such, it is cumbersome to get into contractual agreements with largescale supermarkets. No wonder it is difficult to find Ugandan made agriculture products in huge chain stores among high consumer economies in the West and Asia. Perhaps one way out of this is to try out one agriculture commodity and manage it carefully across the entire value chain till it gets to markets both within and abroad.

Entire value chain management implies that supply in terms of both quantity and quality is managed scientifically.  Gradually, lessons learnt can be replicated to other agricultural products with adjustments depending on the nature of the product and in the end Brand Uganda can be developed. Brand Uganda and investment opportunities within Uganda are equally not well marketed abroad as we have failed to have Commercial Attachés at our foreign missions.

This implies that awareness of investment opportunities and the products Uganda can sell to the world are compromised. As such going forward, perhaps it could be imperative to have Commercial Attaches at foreign missions while ensuring that the success of a foreign mission be partly defined by the number of business opportunities successfully identified by a mission.

Furthermore, there ought to be a seamless interface between the Ministry of Foreign Affairs and that of trade, industry and co-operatives for ease of information flow about opportunities within Uganda.

Another lingering issue is our education system. This is especially so as it raises many questions for example: for whom does our education system service? What is the linkage between our education system and the labour market? What kind of Ugandan human resource do we need in the near to medium term and long term?

How then can we design the education system to deliver the kind of human resource that we need as a country?

Unfortunately, entry of the private sector into the business of education service provision has meant that traditional quasi-public schools that invested in developing an all-round individual have been relegated to the back seat by the academically excelling private schools of which it is a matter of time for public universities to be overtaken my private universities. Note that the primary objective of the private sector is generating as much profit as possible yet to subject our education to the whims of the private sector risks nurturing human resources in ways that may not be deemed relevant to our economy.

In that regard, education ought to fairly remain a public good with the Government having an active control on activities within the sector while ensuring a fair degree of uniformity in education service provision across the different education levels.

Another derailment is the anti-investment land tenure system. While communal land ownership was perhaps aimed at keeping the only source of food within the hands of community; this was ideal in a peasant economy.

However, today where both the occupants of land and land itself are tradeable implies that it is now possible to have idle land or land that is not under optimal economic utilisation basically because the rightful occupants are trading their labour elsewhere or do not have sufficient economic resources to exploit it.

However, the social attachment to land as opposed to trading it to potential investors has rendered tracts of land underutilised and consequently hurting the contribution of land as a natural resource to Uganda's economic prosperity. As such, could this be the right time to perhaps consider a debate on burial grounds to the extent that the dead can only be buried in gazetted areas? Definitive public burial grounds has the advantage of eliminating the social attachment to land to the extent that it becomes a tradable commodity.

Furthermore, the overlapping rights to land ought to be carefully calibrated and eliminated. There is no way, such a critical resource can have multiple owners with a title deed in a person(s) names but cannot sell without consulting squatters. That inherently introduces inefficiency in the land market by slowing the process of land transactions and thus delaying investments.

Climate change is now with us in form of new diseases and pests besides unreliable rain spells coupled with longer than expected dry spells. Climate change implies inability to reliably predict farm supplies besides making farming a tad more expensive as farming practices ought to be re-oriented to the changing climatic conditions. Going forward, the Government ought to take keen interest in the development of crop and animal varieties that are sensitive to the changing climatic conditions. Also, as a nation, we might consider having a tree planting day in a calendar year or even at a small scale advocate for tree planting around homesteads. Furthermore, the Government ought to find mechanisms of making cooking cheaper through using electricity or gas as opposed to charcoal and wood.

Finally, the cost of credit is problematic to the extent that even in the midst of low Central Bank Rate, commercial bank lending rates have adjusted downwards only marginally. The high cost of credit is a deterrent to private sector credit uptake. Perhaps the Government should have a honest conversation with commercial banks aimed at abating inefficiencies that result in the high operational and sunk costs accrued by commercial banks leading to high cost of credit to the private sector besides incentivising product development that is local financial market sensitive. 

In a nutshell, while the decade prior to FY 2011/12, Uganda's economic growth rate averaged in the north of 7%, the inability to hit those highs post FY 2011/12 suggests an urgent need for structure transformation with a long term view of the economy's evolution in an effort to induce robust productivity growth and thus economic growth. This implies carefully understanding market failures in education sector, financial sector, agriculture sector and natural resources while at the same time undertaking key public investments in view of the immediate, medium and long term tangible benefits to the Ugandan economy.

The writer is a lecturer at the School of Economics, Makerere University