About me.

Andrew M. Mwenda is the founding Managing Editor of The Independent, Uganda’s premier current affairs newsmagazine. One of Foreign Policy magazine 's top 100 Global Thinkers, TED Speaker and Foreign aid Critic

Tuesday, October 20, 2015

The challenge of economic growth

The debate about the future of Uganda that our presidential candidates should be conducting

We are in the middle of an election campaign and, because our country is poor, the biggest issue should be how to make it rich. For about 30 years, the incumbent, President Yoweri Museveni has been working to grow the economy. To get the best assessment of how he has performed, I go to an organisation that is very good at measuring such things; the International Monetary Fund (IMF). The IMF has data on the economic growth rates of 189 countries since 1950. Its website shows how Uganda has grown over the past 25 years. It also allows us to compare Uganda against the rest of the world.

For a country to develop i.e. transit from being poor to rich, it needs to sustain growth over generations. For instance per capita income in the United States of America today is $54,000 at Purchasing Power Parity (PPP) – the 10th highest in the world. This is because the U.S. sustained an average annual rate of per capita income growth at 1.5% over the last 150 years. Economists agree that this is a result of the U.S. sustaining good public policies supported by sound political institutions.

Another point is that sustaining high rates of growth over the long-term is extremely difficult. Many countries enjoy brief periods of fast growth and retrogress to slow, stagnant, or even negative growth. This has been the problem of most nations of post-colonial Africa and Latin America. It has been most typified by Argentina.

In 1910, Argentina was the 6th richest country in the world in per capita income at PPP. However, its fast growth spurts have always been followed by years of slow, stagnant, or even negative growth. Today, it is 55th.

In his book, The Next Convergence, the Nobel laureate in economics, Michael Spence, found that between 1950 and 2005, only 13 countries in the whole world sustained economic growth rates of 7% and above over a period of 25 years. Sustained 7% growth is important because is about the best rate of growth any country has ever sustained over 25 years.

Secondly, economists and statisticians use “The Rule of 72” to estimate the time it takes to double a nation’s income at a specific annual growth rate. The rule says that if an economy (or anything else for that matter) grew at an average of 1% annually, it would double every 72 years. If it grows at 7% annually, it would double every 10 years.

Therefore if you began measuring Uganda’s growth journey from a per capita income of $250 (where Uganda was in 1986 using 2015 dollars), and consistently grew your per capital income at an annual average rate of 7%, your per capita income will double to $500 in the first 10 years, $1,000 in 20 years, $2,000 in 30 years, $4,000 in 40 years and $8,000 in 50 years. You need 65 years to reach the lower rungs of advanced country per capita income i.e. $24,000. The lesson here is that economic development is a marathon, not a sprint. The winner would be our own Stephen Kiprotich, not Jamaica’s Usain Bolt.

So what do the IMF figures reveal about Uganda’s performance under Museveni? For the first five years of his administration (1986-1990), the economy grew at an annual average rate of 5.23%, making it the 38th fastest growing economy in the world. From 1986-1995, it averaged 5.67% and was 25th fastest. Then 1986-2000 (the first 15 years), it was 5.91% and 19th. For the first 20 years (1986-2005), the growth rate was 6.32%, making it the 15th. For the first 25 years (1986-2010), the average growth rate was 6.5%, making Uganda the 12th fastest growing economy in the world.

Seen in reverse and using 2013 as the base year going backwards, the figures show how Museveni has been performing in recent years. Over the last five years (2013-2009), Uganda’s average growth rate has been 5.06%, making it the 44th fastest growing economy in the world. Someone can argue that this is evidence that Museveni’s performance is faltering. But remember that economic development is a marathon, not a sprint. Five years is really a sprint. So we have to judge over a longer period.

If we go backwards, to the last 10 years (2013 to 2004), Uganda’s average growth rate has been 6.67% (which is really an excellent rate by all standards), making our economy the 31st fastest growing economy in the world. If we push farther, over the last 15 years (2013-1999), the growth rate is 6.82%, the 26th in the world. The last 20 years (2013-1994), growth is 6.92% and 12th in the world. Finally the last 25 years (2013-1989), the growth rate has been 6.56%, making Uganda the 11th fastest growing economy in the world.

If you take the last 10 years, there are 25 countries that have averaged growth rates of 7% and above. When you stretch it to 15 years, this number falls to 21 countries. And when you stretch it to 20 years, the figure falls to only 11 countries. But when you stretch it to 25 years (which is a generation), only six countries have sustained growth rates of 7% and above. Clearly, many countries can afford high growth in the short term (a sprint) but few sustain it over the long term (a marathon), which Uganda has done.

These findings were disarming to me especially because I have always argued that Museveni has presided over an incompetent government. Unless we believe growth comes from the blessings of the gods, there must be policy and institutional competences our government has acquired that have allowed it to sustain impressive growth rates over such a long period.

We also tend to think Museveni governed better in the first five to 10 years. This may be true in terms of the moral purpose of his government. However, this data shows that Museveni has successfully run the marathon of growth.

The IMF growth figures also contradict my second bias that Museveni has stifled institutional development and personalised the state. For any country to sustain such an impressive rate of growth over such a long period of time, it needs good institutions – unless we say institutions do not matter for growth. Only windfalls in form of high prices for minerals like diamonds, gold or oil can allow a mismanaged country to sustain high growth rates. May be my biases captured only a part of Uganda’s reality. Without high priced minerals, only consistently good policies and sound institutions can explain Uganda’s growth story. With hindsight institutions like the ministry of finance and the central bank are good examples.

Some would argue that the life of nations is not only about growth, which is a valid argument. Using GDP to judge Museveni’s performance over the last 25 years is like using one subject to judge the performance of a student studying ten. People care about many other things in a country like jobs (which are scarce) and health and education services (which today are in a sorry state). People also care about democracy, freedom and human rights. And then there is the moral purpose of government. Widespread corruption under Museveni, where the resources of the many have been turned into privileges for a few, means our president scores badly there.

Museveni can retort with some justification that he has done well with roads, electricity and water – and that we should not expect him to be 100% perfect. He can also argue that in the long term, what matters most is growth. This is because the ability of the state to provide public goods and services depends in large part on its ability to generate revenues to finance them. Only sustained economic growth over the long term can ensure constantly increasing state revenues to meet public expenditure demands. At our current level of GDP, Uganda’s revenues are too small to finance a large basket of public goods and services that we associate with a modern state.

There is something fundamental in this data. Museveni placed Uganda on the rails of growth and has sustained it over the long term, achieving a target that is excellent by all standards (being 11th out of 189 countries is not a small feat).

Over the last 25 years Uganda has performed better than Singapore, South Korea, Hong Kong, Taiwan, Malaysia, Botswana, Mauritius, etc. – the growth miracles of the last half of the 20th century. Many people may question these growth figures. But evidence of growth in production and consumption of goods and services like banking, beer, soda, cement, phones, soap, sugar, electricity, internet, hotels, cooking oil etc. prove the point.

But then why are many of our people still poor? Although the success of a nation’s economy is measured in the growth of GDP, the affluence of its population is measured by the growth in per capita income. While Uganda’s GDP growth has been impressive, its effect on per capita income has been grossly undercut by a high population growth rate of 3.3%.  This has given us a very young population (50% are below 15 years and hence not working). Instead we have a high dependency ratio.

Secondly, Uganda’s growth has been driven largely by services. These tend to employ a few elites with a high level of education. Agriculture on which 70% of our population depends for a livelihood has grown sluggishly over the last 25 years. And manufacturing which creates broad-based blue-collar jobs for the less skilled, thereby lifting millions out of poverty, is still small, employing only a few. Museveni has talked a lot about it but done little. He is now heavily investing in transport infrastructure (roads and railways) and electricity, which is excellent. But is this really enough? What more can we do to stimulate manufacturing growth? These are the issues we should hear our presidential candidates talking about.


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