Uganda Developmental economic study

1. Overview of Uganda

Since the late 1980s, the government implemented a series of pro-market structural reforms resulting in a spike of economic growth and poverty reduction from 1987-2010. As a result, Real GDP growth averaged amongst the fastest growing economies in the world. However, it is also important to note that this was coupled alongside rapid population growth; thus, per CAPITA income was only slightly above 3% a year.

Economic Growth In Uganda: Total GDP

In the short term, large public sector infrastructure projects were the main drivers of economic activity, resulting in the large spike in economic growth. However, the heavy public investment projects may result in instability in the long term, such as currency depreciation, inflation and high interest rates.

Life Expectancy in Uganda
Mean Years of Schooling
Comparitive adult literacy rate and life expectancy between Uganda and Singapore.

As one can see in the graph above, the shape of the Uganda curve can be accounted by the following. The HIV/Aids epidemic initially caused major depletion in life expectancy. The introduction of antiretroviral drugs that are affordable and accessible for low income families was a major push in lengthening lives. This was predominantly due to government aid and external donors such as the Bill & Melinda Gates Foundation that have been able to both educate and improve health systems in the country. Uganda's literacy rate has also improved in order to meet the global target, yet an adult population of 10 million people cannot read and write ; this is an indication of a lack of priority in national policy. "Most of us learn under trees or churches, with no place to keep learning materials," said Lukia Kakembo, one of the adult learners who started training in 1997.

On the other hand, Singapore's graph can be accounted for by the following; at independence, most of Singapore’s two million people were illiterate and unskilled. Therefore the focus of this “survival” period was on expanding basic education as quickly as possible. Schools were built rapidly. Teachers were recruited on a large scale. The schools that had been established by different ethnic groups were merged into a single Singaporean education system.

A bilingual policy was introduced so that all children would learn both their own language and English. A textbook agency was created to provide textbooks.

The expansion was so rapid that universal primary education was attained in 1965 and universal lower secondary by the early 1970s. By the end of the “survival-driven phase”, Singapore had created a national system of public education.

Comparitive life expectancy and adult literacy rate between Uganda and UAE,

ECONOMIC DEVELOPMENT IN UGANDA

Education

In 1996 when the national policy for free primary education for underprivileged children was implemented, in record time, numbers in UPE schools soared. Enrolment increased from 3.1 million pupils in 1996 to 8.4 million in 2013.

But this success seemingly falls apart amid a very high number of dropouts and poor-quality schooling for some of those who complete primary school. The UN Educational, Scientific and Cultural Organisation (Unesco) has estimated that 68% of children in Uganda who enrol in primary school are likely to drop out before finishing the prescribed seven years.

An estimated 30% of girls leave school when they start their periods, often because of a lack of sanitary pads. Higher education levels can lead to higher development as this increases human capital. Higher efficiency, higher skill set, and higher productivity in the long term will push economic development.

Property Rights

A private property system gives individuals the exclusive right to use their resources as they see fit. That dominion over what is theirs leads property users to take full account of all the benefits and costs of employing those resources in a particular manner. The process of weighing costs and benefits produces what economists call efficient outcomes. That translates into higher standards of living for people, increasing economic development.

A diagram to show how property rights affect economic development

About 80% of Uganda's population lives in rural areas while about 20% is urban based. The majority of those in the rural areas pursue land acquisition for agricultural production for subsistence and economic livelihood, yet the same land is being competed for by other uses. The ever increasing population, which directly depends on land for survival for agriculture, mining, oil, and gas production, is a compelling factor in itself for exercising good governance while dealing with land matters.

Initially however, farmers not only lacked the right to sell or lease their land, but family members had to continue to work the land if they were to retain control. Uncertainty concerning the definition and legal enforcement of ownership rights discouraged optimal use of land, and investment in assets complementary to land. Ownership of different parcels in Uganda was not clearly specified, boundaries were unclear and good records were unavailable. Thus, Interpretation of customary laws resulted in wide discretion on the part of administrators and judges, contributing further to uncertainty for those who might use the land productively.

However, in 2015, approximately 20 percent of Uganda’s land became registered, which is higher than the average level of 10 percent for sub-Saharan African countries. Despite these better than average figures, security of land tenure in Uganda remains weak due to unclear property rights and a high rates of disputes and conflicts. The government is now starting an initiative towards accelerating the process of registration of land including that owned communally and by religious and cultural institutions.

HEALTHCARE

Healthcare is a necessary part of economic development; as people need to be healthy in order to be more productive and efficient, this increase in productivity and efficiency would cause an increase in both economic growth, increase in life expectancy, decreased infant mortality and higher rates of sanitation: all indicators of economic development.

The sudden fall in life expectancy is due to the AIDS epidemic and HIV mortality peak that occured in sub-saharan African countries such as Uganda; due to governmental stress on healthcare, alongside educational reforms and donations from NGO's, Uganda's HIV mortality has dropped, and life expectancy has exponentially increased from there on. TB and Malaria rates have also slumped down alongside maternal mortality that has declined by 44% since 2000.” Due to improved immunization coverage, malaria control, better water sanitation and the overall socioeconomic development in Uganda, one is seeing impressive results in economic development due to investment in human capital, which especially has effected subsistence and agricultural farmers.

International trade and economic development

With substantial natural resources, such as fertile soil and adequate rainfall, agriculture forms the most important economic sector of Uganda. The country also has sufficient copper, gold and (found only after 2010) oil deposits. The agricultural sector employs more than 80% of the workforce. Coffee is the country’s principal export item.

The early 1990s saw reforms ushering in tremendous economic growth, based on infrastructural investment, better production and export incentives. Some other factors include the comparatively low inflation, improved domestic security and the return of Indian-Ugandan entrepreneurs.

The sudden increase in exports in 2013 was due to Uganda joining the EAC, which led to tarrifs being removed in the region, ease and lower cost of transport, and increased trade within the EAC. 3/4's of Uganda's GDP is currently due to agriculture; the “Farm Africa’s" initiative has helped create a co-operative for farmers furthering the possibility for creation of a lucrative export market and further increase their incomes. Uganda has thus been focusing on export led policy's to further their GDP, involving investment and subsidization of exportation industries leading to higher incomes, growth in domestic markets, and achieving comparative advantage. The specialization on exportation was strategized as the leading factor in increase in aggregate demand to increase Real GDP of the economy.

Despite a booming export industry, Uganda runs a trade deficit as it imports capital machinery, petroleum, vehicles and medical supplies from: UAE 11.4%, Kenya 11.3, India 10.4, China 8.1%, South Africa 6.7% and Japan 5.9%. However, the most important step when it comes to increasing Uganda’s export volumes is the need to narrow down Uganda’s focus on a specific niche and a specific export area. Uganda’s major export products are coffee, fish and fish products, tobacco and tea, flowers, cotton and maize. This alongside large importation, leads to inefficiency and lack of comparative advantage.

DIVERSIFICATION

Agriculture accounts for around 42% of real GDP and 80% of employment; coffee is the main export (over 50% of total merchandise exports in value).

As a result of diversification efforts, the share of the industrial sector in real GDP has increased, from about 17% in 1996 to around 20% in 2000. Due to diversification, Uganda's coffee price volatility is also less (as shown by the graph below). Although, insufficient infrastructure, coupled with Uganda's landlocked status, has impaired the growth of its exports and its economic progress.There has been some diversification of exports away from coffee to other items such as flowers, fish, and other agricultural exports. This is reflected in the improvement in the export diversification index from 0.8230 in 1996 to 0.6224 in 2010. This is also reflected in a reduction in the peaks and dips of price volatility of coffee below.

Coffee Prices and Volatility over the past 5 years.

Whilst price volatility has improved, Uganda is still heavily affected by international trade; hence, changes in commodity prices affects the level of inequality of an economy (Burtless, 1995). In Uganda, coffee is primarily grown by smallholders in the rural world and price booms help reduce poverty (Bussolo, Godart, Lay, & Thiele, 2007). As a result, policy recommendations tend to suggest improvements in the wages in the agricultural sector. Thus, the government has introduced fair trade to aid workers during dips in prices for coffee.

Fair Trade

Gumutindo is a Ugandan coffee cooperative which has experienced massive growth over the last few years, largely thanks to Fairtrade. The cooperative has been able to increase their sales from 54 metric tonnes of coffee in 1998 to more than 1,000 metric tonnes today. Irish Aid works with Fairtrade to help farmers to get a fairer price for their crops. The higher prices has also incentivized better quality coffee.addition to their ongoing efforts to improve the quality of their coffee, alongside economic development: it insists that women should be employed at all stages of production.

“Half of our board of management and 60% of field officers are women. We wanted them to be involved in management and marketing, from the farm right up to production and delivery.”

REGIONAL TRADE AGREEMENTS

Uganda is projected to earn an additional $2.5 billion from non-traditional trading partners in the region and close the trade deficit in the next five years if it removes trade barriers with neighbors, the World Bank announced. Further, this would help Uganda stabilize its economy in the face of a slowdown in overall growth and reduced aid flows, the World Bank says.

Uganda, Landlocked map for reference

Beyond the East African Community, Uganda should position itself as the land bridge to link other landlocked countries to the coastal economies, a sort of regional integration and trade looks like the best opportunity for a brighter economic outlook. A more rapid diversification of the economy and the appropriate and most efficient use of resources, including oil, will drive renewed growth momentum.

TRADE LIBERALIZATION

A report by the World Bank, suggests that Uganda should work to eliminate non tariff trade barriers in effort to diminish the cost of trade and business, alongside transport costs, to subsequently increase productivity, connectivity, efficiency and to make the country a better " land-linked partner."

Uganda’s overall position in terms of its transactions with the rest of the world improved in 2012 on account of increased capital inflows. At the same time, the current account deficit worsened and the slight improvement in services did not compensate for deterioration in the trade balance of goods. Currently, the trade imbalance is estimated at $2.4 billion.

Evaluating Trade Liberalization in Uganda

The liberalization of the trade regime, over the last decade and a half has attracted foreign direct investment, mainly in manufacturing, and contributed to continued economic growth. Over the past 6 years, Uganda's real GDP has grown at around 6% per annum on average, and is expected to continue growing at about 7% per year in the medium term.

The opening up of the economy to foreign capital has generally resulted in increased foreign direct investment as a share of GDP, and a sizeable amount in the services sector. The gains in the labour market from trade expansion and policy reform are also reflected in the poverty dynamics.

Head poverty decreased from 44% in 1997 to 35% in 2000 but rose again slightly to 38% in 2003 before declining to 31% in 2006. The poverty rate is currently estimated at about 24%. There is evidence that the temporal and spatial trends in poverty rates bear some relationship with export performance in general and international prices, as poverty rends coincided with the reduction in the international market price of Uganda's main export commodity-coffee. Thus, liberalization of trade has generally led to more employment of people, leading to higher disposable incomes and an increase in both economic growth and development.

Positives of Liberalization of Trade

However income increase will be entirely dependent on the Marshall Learner condition, and trade liberalization may lead to increase importation, worsening the trade deficit.

Bilateral and Regional Trade Agreements

"Uganda has entered into a number of regional agreements, including the East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA). These regional agreements have yielded significant dividends, almost doubling Uganda’s regional exports over five years, to 25 percent of total exports in FY11,” says Minister of Finance, Planning & Economic development. “To benefit more from regional trade, Uganda would need to ensure that there is an efficient transport flow and more efficient movement of goods to regional markets. Thus overall, removal of trade barriers and an increase rate of growth due to investment in infrastructure including oil, alongside a higher level integration between Uganda's economy and regional and world economies will drive Uganda's economic development and growth.

Import Substitution Policy

The president of Uganda resecently mentioned in his speech that he will "ban the importation of second hand products, create conducive environment for investors, lower transport and electricity costs to boost local production in order to reduce imports and increase exports". This suggests that policy changes are being triggered to prevent Uganda being flooded with imported goods at the expense of local manufacturers and domestic job opportunities.

Textile Industry in Uganda

The government has further argued that if all the textiles used in Uganda are locally made, instead of importation, the country will save 888 million dollars annually and create about 45,000 direct manufacturing jobs. He said the key bottlenecks to fast track industrialization is if Uganda addresses transport and energy infrastructure.

Whilst this may support inefficiency and misallocation of resources, it would provide greater job opportunies, and boost economic growth, subsequently boosting economic development (due to increase in income).

positive impact on uganda?

Foreign Aid

Positives

Aid, specifically humanitarian and government aid has positively impacted Uganda, which is amongst the world’s top aid recipients for several decades. Between 2003 and 2012 the country received more than $16 billion in official development assistance (ODA), ranking them as the 13th largest recipient worldwide. The ratio of aid-to-GDP peaked at 19% in 1992, and has remained around 10% over the last two decades. One one hand, international donors have monumentally helped government funding with 42% of government budget in 2006 from international donors, although this ratio has decreased almost in half over recent years, the government still relies heavily on donations to fund bills. Foreign aid has not been used to balance budgets and has rather increased efforts at raising tax revenues (which are already very low) as aid donors regularly attach certain conditions on fiscal behavior. Through foreign aid- recipiency, recent reports from the UN have concluded that international aid has contributed to a significant overall reduction of poverty — although this has been polarized to certain regions of the country (not east and north).

Negatives

On the other hand, the foreign aid may have negatively impacted Uganda as it has also initiated a lethargic response from the government coupled alongside a dependency on foreign aid for budgeting. With foreign aid accounting for over 20% of government revenues, there is an expected negative effect on fiscal behavior — for instance, by eroding government incentives to raise capital through better tax collection. If tax collection becomes implemented, citizens are "paying" for a government and can thus demand better policies and fiscal implementation which has subsequently been missed out as of now

Conclusion upon Evaluation

However overall, for Uganda, economic forecasts are largely positive — with an improved current account balance, strong economic growth, and continued poverty reduction — making the case that foreign aid has positively impacted economic development.

Trade

Positives

Trade specifically with India has played a key role in Ugandan development in the manufacturing, trade and service sectors. Foreign businesses in trade employ thousands of Ugandans increasing household incomes and leading to greater education, healthcare, and money for sanitation; they are also among the largest taxpayers in Uganda, increasing government budgets for developmental sectors.

Negatives

However, whilst India has emerged as one of the largest investors and trading partners of Uganda, bilateral trade between the two countries amounted to $728 million in 2010–11, but the balance of trade is heavily in India's favour; Ugandan exports to India account for only $16.7 million of the total trade and thus Uganda can be argued to have less benefit from the bilateral trade. Uganda imports almost 30% of its pharmaceuticals from India, and firms run by PIO families and PIO business groups, such as the Madhvani, Mehta, Mukwano and Ruparelia, are among the largest in Uganda, while Indian companies, such as Tata Coffee, Bank of Baroda and Airtel, have a significant presence in Uganda.

Foreign Direct Investment

Positives

Dupasquier and Osakwe (2005) note that foreign direct investments in Uganda contribute to employment generation resulting in higher growth, raised skills of manpower through training and learning and long term positive impacts on employment. According to Moss et al. (2004), while FDI comes with its benefits in terms of increased capital and integration into global economic networks, at a microeconomic level Uganda imposes a legal binding on foreign direct investments whereby they cannot outsource employees, and must employ locals; as such FDI's in Uganda employ a 10 to one ratio of foreign employees to local employees as shown in Figure below:

Uganda Investment Authority anticipates a 7% growth in FDI in 2011. In 2010, all foreign firms in the local market employed 65,000 people directly and it was found to have a multiplier effect of 2 workers employed indirectly per employee. Generally, local and foreign investments in Uganda generated 149,000 employment opportunities n Uganda in 2010. FDI accounted for 47% of the jobs created while 53% of the opportunities were in the locally owned firms (Uganda Bureau of Statistics, 2011).

FDI creates 70,000 direct employment opportunities and indirectly employed more than 165,000. A specific example would be the new discovery of oil deposits in Uganda which attracted foreign investors, as Uganda doesn't have the capacity to explore and extract the resource efficiently, this indirectly also benefited the manufacturing sector which had the greatest percentage of opportunities created from FDI. Companies such as Tullow Oil (TLW.L) of Britain, Total (TOTF.PA) of France, and the Chinese CNOOC Ltd have invested and are planning to invest millions of US dollars in refining crude oil and marketing oil products (Uganda Bureau of Statistics, 2011).

Furthermore, the agricultural sector that is the source of livelihood for 80% of Uganda’s population has also thrived as a result of the backward linkages between local producers and the foreign firms that require the semi-processed goods for production of finished goods for consumption locally and abroad. People employed indirectly through FDI are more than those directly employed by FDI, and this spillover effect is significant for economic development since it ensures that all levels of human resource capacity are utilized (Yarbrough & Yarbrough, 2002). It has further helped reduce unemployment rates on the basis of lack of skill set in the local labor market, causing long-term economic development too in the form of an increase in productivity and efficiency. Due to this, foreign investors are incentivized to train more Ugandans to take up supervisory positions in the organizations, and this trend has enhanced knowledge transfer; this trend was further supported by a study conducted to see the number of Ugandans occupying top management positions in foreign subsidiaries in the country, and established that FDI accounted for 47% of the total number of jobs created in 2010- an indication of the significance of FDI in employment creation.

Moreover, companies that are investing in Uganda also have to pay corporation taxes and this accounts for a large portion of government budget, which allows for investment in healthcare, education, and increased productivity and decreased poverty in the long run, resulting in a spike in economic development.

Further, Uganda lacks the capacity for commercial extraction and utilization of critical available natural resources. Equipment and financial resources from foreign companies in the form of FDI have enabled the extraction of mineral deposits, utilization of the vast arable land as well as exploration of hydrocarbon deposits. Technological transfers and spillover of man power from the foreign subsidiaries to local organizations has helped in developing the capacity of the local labor force making people more productive and domestic organizations expanding their production capacity thereby increasing employment opportunities (Yarbrough & Yarbrough, 2002). Moreover, the transferable skills enable Ugandan’s to take up senior positions that would otherwise have been occupied by expatriates.

Negatives

However, FDI also has a negative side by virtue of the nature of employment opportunities created. A greater number of unskilled people are employed by foreign companies in contrast to the domestic firms; this indicates the thriving foreign business at the expense of the people. Moreover, the presence of child labor has a negative impact on the future of Uganda’s labor force. It is recommendable that the government offers incentives focused on encouraging rural development. FDI is currently concentrated on major towns, especially in manufacturing which employs majority of the workforce. Rural infrastructure needs to be developed to attract foreign investors, which would help in minimizing rural-urban migration, which is hampering provision of basic services in Uganda’s towns. Moreover, creation of employment in the rural areas would spread the spill-over effects all over the economy leading to balanced economic growth, instead of the current imbalance in the Ugandan economy.

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