Building domestic markets to support trade and rising incomes

By Admin

When incomes are strengthened, a country is able to build a new level of class consciousness.

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By Odrek Rwabwogo

We have spent a disproportionate amount of ink on manufacturing, trade and how to increase our exports. This is because we believe there is no medicine against poverty or a more reliable test of the ingredients of a good ideology than a tool which helps people's incomes consistently rise.

Trade in particular, throughout history, has proven itself a major tool to achieve this objective. Even on the rank of global issues such as country carbon emissions, quite often used by the West as an argument against developing countries to slow down the manufacturing and trade race, Africa still has plenty of leg room to increase its industry without damaging our planet. For example, there is not a single African country on the top 10 list of polluting nations.

China tops the tables at 29.1% followed by the US at 15.1% and the EU at 10.5%. Indonesia is the last on the tables with 1.4% global emissions share. Not any African nation. It means even our opening up of large commercial tracts of land for agriculture (About 600million hectares of land or 60% of the global arable farmland is in Africa) mother planet still stretches out her hands beautifully, allowing us to produce more without harming her.

We are not there yet. We can manufacture and trade our way out of poverty, increase our incomes rapidly and hold out for many years to come without disturbing our ecological balance. This is possible; if we improve our technical capabilities even by a minor 10 percentage points to catch up with South East Asia's lower middle income countries of Vietnam, Indonesia or the Philippines.

When incomes are strengthened, a country is able to build a new level of class consciousness that transcends tribal and religious differences and in turn set stronger institutions in place for the next generation.

The outcome is a nation ceasing to be an abstract object in the minds of her people and becoming a felt notion, one whose institutions the people seek to protect and defend so that they (institutions) advance the common interest of all of the citizens irrespective of each's political persuasion or social-economic status. In the end, it is these institutions and not the reliance on an overbearing cadre of leaders even if they have been blessed with charisma, experience, a positive temperament and other good attributes, that lay a firm foundation for an irreversible match to a democratic culture and a strong base for prosperity.

We need to pose a question: How do we improve exports if we are not able to simultaneously raise the consumption of what we produce at home?

The Indian born Ugandan pioneer entrepreneur, Vithladas Haridas Madhvani arrived from Gujarat, India, to Kaliro in Iganga in 1890 and set up a shop (Duka- even changing our trading language) to sell sweets, paraffin, match boxes, soap and other merchandise to the local community in Busoga. Not long after, business was so good that he sent for his younger brother Kalidas and soon after, Mulhjibai Madhvani, his distant cousin and friend to join him in the Ugandan booming enterprise. Another young man from Porbandar in Gujarat too, had previously arrived, about 1900 and at 18 years of age, he too set up shop in Kamuli and went about planting cotton, coffee, tea and other cash crops. His name was Nanjibhai Kalidas Metha. By 1914, these adventurous young people had expanded and taken in many business opportunities opening shops in Kamuli, Jinja and Lugazi towns, then small fishing villages. When the First World War broke out and many merchant ships bringing goods from across the ocean were mobilised for war, the market for coffee and cotton in which they had invested their savings and energies, collapsed.

Low commodity prices on account of war forced these families to take a foray into manufacturing items for household use and in what we think was an epiphany; they helped open up an industrial culture in a peasant society and in the process begun to add value to Ugandan agricultural produce. This was done at behest of the British to not grant factory licenses to any Ugandan Indian in order that they (British) could keep a monopoly of cotton trade and export of raw material to support their textile industries in Manchester, Derbyshire and South Lancashire.  Khalidas Metha, however, had by 1923, established 29 cotton ginneries all the way from Busembatya to Jinja and up to Lugazi, selling to whoever was willing to buy his cotton. Prominent among those who financed his early cotton trade was Toyo Menka Keisha Cotton company, a Japanese firm, the first to trade in Uganda. This firm in turn sold to Europeans at a competitive price. By 1930, Vithladas Madhvani, his family and partners too, had branched into sugarcane growing and processing, setting up a 150 tonne/day plant following the early lead by Khalidas Metha. Metha opened his first plant at Kawolo in 1924 with a very reluctant Ugandan colonial Governor, Geoffrey Archer, in attendance. Governor Archer had such rapt attention, wondering at the speed at which the Indians of Uganda had defied colonial orders and gone ahead to plant early seeds of industrialisation in the country.

Metha's Lugazi sugar plant by 1927 produced 50,000 bags annually and Europeans, emerging African and Indian elite in various Ugandan towns, Kenyans and the Tanzanians, all enjoyed the first taste of the commodity in their teas and coffees at home. "The sugar manufactured was so damp that it had to be dried in the sun [at that time], yet all the produce was locally sold", wrote Nanji Kalidas Metha in his 1966 biography, underlining even as early as a century ago, the importance of market diversification, the building and strengthening of our domestic market and the need to lessen dependence on falling commodity prices to our economy.

As the reader might know, by 1970, when the Uganda's little enclave economy begun to flounder, the Lugazi sugar flagship entity together with the family asset base, the Metha group, were worth $40m (about $247m in today's value) and employed about 15,000 people. While expropriation destroyed a significant operation in Uganda with its fast expanding domestic market base, it inadvertently helped the business explore growth in other industries such as packaging, cement, building materials, cables and in floriculture; this in other markets in India, UK, US and Canada. By 2014, this asset base had expanded to over $350m. It is the same with their early arrival kin at Kakira, the Madhavanis. Their annual turnover today is about $500b and a total asset base in the region of $1b. The point to make is that these companies relied heavily initially on the domestic market before springing out into the international market. If that could be the source of growth when the Ugandan market was a fraction of what it is today, why are we unconcerned today about strengthening it? Why do we allow manufacturers of, for example, simple household items in Uganda, to face competition from cheap imports from Asia and hope to build a strong domestic tax base or reduce our informal sector?

 

The reason we tell Madhvani and Metha story is not just about showing the pioneering role of processing and the start of an industrial culture in Uganda led by this small but highly enterprising Indian migrants group. We tell this story to demonstrate the need for building a strong domestic market when the pitfalls of growth that heavily relies on foreign trade, becomes evident, as they are bound to for every nation. As an example, Russia in August 2014, imposed a trade embargo on European dairy, meat and vegetable products. This was in response by Russia to the West's financial and economic sanctions on some of her companies and politicians over their country's involvement in Ukraine. By July 2015, the EU agricultural exports to Russia fell by 43% from $12.3b to $5.3b and an estimated 130,000 jobs were lost in the EU agricultural sector alone. This is a warning and a demonstration of the need to nurse and grow the local market as an insurance against abrupt external shocks. In fact, if there's any lesson to Uganda, the South Sudan experience should be telling. From both informal and formal exports amounting to $1.174b worth of trade in 2008/2009 (informal trade rose from a paltry $9.1m in 2005), this market has on account of security and economic reasons, so contracted that by September 2015, the value of Uganda's exports to South Sudan, which at 15% of our total exports constitutes our largest export destination, was less than $299m. In certain growth driving sectors such as cement, steel, tea and beer exports, the Ugandan product sales to Juba have fallen between 50-77% from December 2013.

How do ameliorate these loses?

There are two ways we would like to propose for growing the domestic market. First, to make a concerted promotion of consumption of what we produce before we can sell to outsiders even if we know prices might be higher outside, in the short run. The benefits of local consumption in the long term run deeper and improves productivity at a firm level, providing a sound base for economic growth for the country than temporary but unsustainable high prices in the short term. It also helps end the strange abnormality of an Africa that produces what it does not consume and consuming that which it does not produce ending up hugely incapable of manufacturing things such as weapons to fight her wars or vehicles to transport her people, food and clothing to feed and dress her people who now line up for second hand clothes yet they grow the best cotton in the world or being able to innovate her own medicines against tropical human and animal diseases. I find it disconcertingly depthless when African leaders and their elite put up airshows of foreign made aircrafts or line up heavy weaponry and equipment at national functions in a martial display of their defense capabilities when in reality they are not able to manufacture or replace spare parts of the arsenal on display. One must make a thing before they can proudly display it. The process of Making creates real equity and ownership for a country. There cannot be any form of defense in an equipment whose software and hardware one has no control over; he who sells to you can always disable you when need arises.

To demonstrate the fact of a nation consuming what it produces first before marketing to others, we will use the example of two countries: Ethiopia and South Africa coffee and wine value chains respectively whose role in building domestic market is admirable.  Ethiopia, the birth place of coffee has over 515,000 hectares of her land under the crop, raising an average annual production of about 7.5 million bags. In the year 2011 alone, the country made $528m in export revenues (almost 31% of all foreign exchange earned in 2012). The key lesson, however, is that about 48% of the national coffee production in Ethiopia is consumed locally with each Ethiopian citizen on average drinking four cups a day of strong Arabica coffee. As a result, the coffee chain industry is more developed in Ethiopia and part of the key sectors attracting 79% of the manufacturing foreign direct investment into the country. In fact, there are several East African companies relocating to Ethiopia attracted by the country's favourable domestic market protection strategies for manufacturing fast moving consumer goods (FMCGs). This is what contributes to a high retention of manufacturing FDI in the country.  Uganda only attracts about 8% of this type of FDI. About 80% of Uganda's coffee is instead consumed in Europe taking with it many of the jobs in research and extension, inputs, design, marketing, processing and farmer credit out of the country. This leaves the farmers with less than 12% of the value chain. It is the same in many other coffee producing countries in Africa. Coffee being the second most important traded commodity in the world after oil, this is a huge loss to the African farmer who relies on a foreign market for his produce.

Promoting local drinking of coffee, therefore, would begin the process of retention of a significant portion of these skills and jobs. For example, the tastes and preferences of many young millennial workers in Kampala are changing fast. Many are replacing traditional tea drinking habits adopted from parents, with coffee. Even with only 200,000 bags of coffee (out of the average annual production of 3.4m) which we process and drink in Uganda, there are more than 40 coffee houses that have sprung up in less than five years in Kampala alone, a welcome development. While this is still a minuscule compared to, for example, Britain's 20,758 cafe outlets with a staggering market value of $11.7b, the few cafes in our city are a good start for Uganda. If you are a coffee drinker, you won't miss a cup of cappuccino now popular at many cafes in and around Kampala selling at an average of sh10,000 each. There are about 80 restaurant size cups out of a kilo of ordinary Kiboko robusta coffee which farmer sells to a middle man at only sh2,000. So, as one can tell, out of a Ugandan value chain that generates sh800,000 out of a kilo for coffee sold at a restaurant table, the farmer earns less than 2%. If we, therefore, are able to improve local coffee drinking share and its standards and strengthen the market, the value chain will expand in a few heads and bring in many more jobs that will eventually lift the farmer's share in the consumer price.

The second example comes from South Africa, the world's eighth producer of wines. The country exports over 450 million litres of wine contributing $3b to the country's economy. About $1.5b of this money is retained in the Western Cape Province, the largest wine producing region in South Africa. While the competitiveness of the country's wines has recently been affected by increased energy tariffs, power outages and industrial action in South Africa, the country negotiated a quota and duty free entry of 110 million liters into the EU market, beginning in 2016. This is to focus on more export (if the reader is a keen observer, there has been ongoing South African wine promotions in Uganda at key restaurants. Uganda, Tanzania, Mozambique, Angola and Nigeria are some of the fastest growing markets for South African wines) and increase earnings. But what is more interesting to watch is the level of promotion and consumption of South African wines by South Africans themselves, in order to strengthen their wine sector against external shocks. In 2013 alone, local wine consumption in South Africa reached a peak of 373million litres (about seven litres per capita). At about $2 per litre, this is an average annual revenue base to the country from her own local market, of $746m. In the same year, the sector paid $522m in taxes to the South African government. With the continued expansion of South Africa's middle class, this is expected to increase and will more than cover the shortfalls from low exports or global price changes in her mineral sector.

The Ethiopian and South African experience described above should help Ugandan planners and policy makers to not let our domestic market become a child's playground for cheap non East African products. These products and services depress the productivity of our people yet our exports continue to achieve falling unit prices with the same external trade partners who sell finished products to us giving a huge imbalance in our trade account. For example, the more coffee we produced in 2014, the less we earned from it; from $424m a year before to $409m when we increased our output by another 200,000 bags to 3.6m 60kg bags. This should give all of us fighting to raise jobs for our youth, sleepless nights. We got to change this by diversifying our exports, increasingly rely on goods of complexity for export and protect and expand our domestic market.

Next week, we will discuss the second ingredient to increasing our market. It is the performance of the East African community.

The writer is a farmer and an entrepreneur