How economic performance indexes contradict assumptions about the corruption and ineptness of our government
Sometime in 2001, former Costa Rican President Jose Maria Figueres visited Uganda. At that time he was Managing Director of the World Economic Forum. At a conference also attended by President Yoweri Museveni at the International Conference Center in Kampala, he said that Costa Rica had grown her export earnings from US$ 1.3 billion to $5 billion in ten years.
Figueris is a flamboyant guy. “We had to literally fold our sleeves,” he said with an American accent, “and do real hard work on policy and on institutions to ensure we grow our exports.” I was impressed. That same day, I asked Figueres to lunch which he accepted. Later that evening I hosted him on Andrew Mwenda Live, my radio show on KFM, then Monitor FM.
At the time, Uganda’s export earnings had declined from a peak of $520 million in 1986/87 when Museveni came in to a low of US$230 million in 1992/93; then jumped to US$890 million at the height of the coffee boom in 1996/97 before falling back to US$644 million in 2000/2001.
On the show with Figueres, I also denounced government ineptness at presiding over stagnant or declining export earnings. “In 15 years since this government came to office we have only increased our exports by US$120 million; in fact in the last five years our export earnings have declined by almost 30 percent,” I said with the confidence of a man who had his figures right.
Fast forward: In 2012, I downloaded about 500 shows of Andrew Mwenda Live onto my iPhone and began listening to them as I ran on the treadmill. It was my first time to listen to my own show and I landed on my interview with Figueres – which I had forgotten I ever did.
It was eleven years since. So I went to the ministry of finance to get the figures on our export performance. Bang! It was US$4.5 billion – a seven-fold growth in eleven years. Uganda had beaten Costa Rica at the rate of export growth yet no one in government had folded sleeves to do any hard work on policy or institutions. It was the same corrupt and incompetent administration – or was it?
I had been mauling over this recently when the four East African Community (EAC) members – Kenya, Tanzania, Uganda and Rwanda read their budgets on June 14. Kenya budgeted to spend US$ 19 billion. With 44 million people, it will be spending US$ 432 per person next financial year.
Kenya’s nominal Gross Domestic Product (GDP) is US$ 41 billion. That means its public expenditure is 46 percent of GDP, a percentage slightly above Germany at 44 percent, Norway at 42 percent and Japan at 37 percent.
The second was Rwanda. With 10 million people, it budgeted to spend US$ 2.6 billion (37% of its GDP), giving it expenditure per capita of US$260. Tanzania came third; with a population of 45m, it budgeted to spend US$11 billion (39% of its GDP) giving it per capita expenditure of US$244. Uganda is a distant last; with an estimated 35 million people, it budgeted to spend only US$5 billion (23% of GDP) i.e. US$147 per person.
The figures intrigued me. Could it be that Uganda cares least about its people? This is an ideological debate. Those who believe in the power of govenrment to improve people's lives (followers of John Keynes) would agree. However, those who believe in limited government (followers of Frederick Von Hayek) would say Uganda has the best government policy - limiting government taxation and public spending to the minimum.
But then the 2013 IMF and World Bank Global Monitoring Report on poverty showed that while only 38% of Ugandans live in poverty, the figures are 43% for Kenya, 63% for Rwanda and 68% for Tanzania. Could it be that increased government spending does not do much to reduce poverty?
Uganda also has the lowest tax to GDP ratio at 12% compared to Kenya at 21%, Tanzania at 15% and Rwanda at 14%. Economists use tax administration as a proxy for state capacity. From this, Uganda has the weakest state in the region. Could it be that Uganda lacks a social map of its people to identify their income and tax it?
Could the Uganda state be hostage to the high income earners and is therefore unable to tax them? Could it also mean tax laxity has allowed Ugandans to keep a large chunk of their income from the state? Or are Ugandans `richer’ because their better soils allow nature to do the trick for them?
Why does Kenya have a higher tax to GDP ratio than Rwanda, which I think has the most effective state in the region. This may be largely because it has a larger industrial base and therefore a much higher taxable GDP.
Yet according to PWC and World Bank Paying Taxes Index, Rwanda has the highest tax compliance levels in East Africa. Out of 198 countries sampled globally, Rwanda is 25th, Uganda comes second at 93, Tanzania at 133, Burundi at 137 and Kenya at 164.
Thus, using tax administration as a proxy for state capacity, Kenya has the weakest state in East Africa. Yet Rwanda’s exemplary performance may not be due to state effectiveness alone. The more critical factor may be found in the Legtum Prosperity Index.
It shows that Rwandan citizens (at 98%) have the highest confidence in public institutions of any country in the world. This may mean many Rwandans are tax compliant because they believe that when their government taxes them, it uses the proceeds for the good of the country.
Finally, Uganda and Rwanda have gone through prolonged military rule and destructive civil wars while Tanzania and Kenya have been stable since independence with civilian administrations that have overseen peaceful changes of government.
However, this stability does not seem to have made these countries particularly better off. The indexes on poverty and state effectiveness do not show Uganda and Rwanda to worse off in comparison to them.
Nominal per capita GDP in Kenya is US$1,000, Uganda and Tanzania US$600 while Rwanda US$700. Uganda and Rwanda’s GDP per capita is closer to that of Kenya in 2013 than it was 1962 in spite of years lost to military rule and civil war.
This means that Tanzania and Kenya’s stability and civilian rule for the last five decades has not given them exceptional advantage over their unfortunate rivals. The question is why?