Why we need to think of how to develop national capacity to manage our economy
Uganda is going through the worst economic performance since 1987 when the government of President Yoweri Museveni began liberal economic reform. In the first quarter of this financial year, the economy contracted by 0.1%; the second quarter it grew by 0.8%, far below projected growth of 5.5%. Given a population growth rate of 3.12%, per capita income has contracted by 2.3% between July and December, the reason The Independent last week reported that Ugandans have grown poorer.
Evidence of distress is everywhere. Last year, Uganda’s fourth largest bank, Crane Bank, went burst. The real estate market, an important measure of economic vitality, is sluggish. Non-performing loans as a percentage of total loans have increased from 5.29% in December 2015 to 10.47% in December 2016. Because the real estate market that underwrites loans is in distress, banks are stuck with collateral they cannot dispose off to recover their money.
Outside of the banking sector, many companies are saddled with unsold inventory while others are suffering declining sales. Some are laying-off workers. I am aware that most people don’t care about the statistics I have outlined above in large part because they are just numbers. However, behind these numbers are important factors that foster economic wellbeing of people. So what has happened to Uganda’s economy that has run a good 30 years marathon at an impressive average growth rate of 6.74%?
Before government critics can jump on these numbers to score points, let us note that across the board, African economies are doing badly. This is because of the slowdown of economic growth in China and continued sluggish growth in Western industrialised nations all of which have led to a decline in the demand for commodities that constitute most of Africa’s exports. According to the IMF Regional Economic Outlook for Africa of October 2016, the best ten growth performers for 2017 were projected to be Ivory Coast at 8%, Ethiopia at 7.5%, Ghana at 7.4%, Tanzania at 7.2%, Senegal at 6.8%, Kenya at 6.1%, Rwanda at 6%, Burkina Faso at 5.9%, Uganda at 5.5% and Mozambique at 5.5%.
But even from these figures we can see a problem. Seven years ago, the economies of Ethiopia, Rwanda, Tanzania and Ghana were growing at a rate of 8% and above; and Uganda was close to that figure. So the current IMF projections show a significant decline in the performance of Africa’s best performers as well. And for Uganda’s perennial skeptics who argue that growth figures are cooked, this is a reminder that public institutions like Uganda Bureau of Statistics, in spite of their weaknesses, still do a good professional job.
Uganda’s growth, however, has been made worse by a draught that hurt agriculture. Secondly, there has been a significant reorientation of the budget towards greater development spending and reduced spending on consumption. While spending on huge infrastructure projects like roads and dams as Uganda is doing is a great thing, our problem is that most of the contracts are going to foreign firms with little or no enforcement of local content rules. Thus foreign contractors, especially the Chinese, import large numbers of semi-skilled workers and other inputs. And when paid they repatriate their profits back home. This imposes a severe strain and drain on our foreign exchange.
We must also remember that there is always a gestation period between when construction of a dam or road begins and when it is finished and fully utilised to deliver the productivity growth dividend.
So the immediate economic growth dividend must come from use of local factor inputs, employing local manpower and investing the profits in the domestic economy. One has to worry about Africa because whenever this continent is growing, someone is doing the work for us. When the Americans, British, Germans, South Koreas and today the Chinese were building their roads, railways and dams, they used their own companies and people. Why does Africa rely on foreigners to build her infrastructure?
Returning to Uganda, more investment in dams and roads is sucking money out of the economy and sending it to China. It is true that once completed investments in Karuma, Isimba and the many road projects will drive economic growth. But this will happen in the medium term. In the short term, Uganda is suffering from a liquidity squeeze and slow growth which may become a long term problem if we do not develop local capacity to handle these large infrastructure investments using locally owned firms.
Uganda has little or no control over growth in China and other Western industrialised nations. However, it can reduce reliance on foreign contractors to do large construction projects. This would be through enforcement of local content rules and by developing a long-term strategy to build local firms. And most critically, Uganda (and Africa generally) needs to seriously rethink its obsession with Foreign Direct Investment (FDI) as a panacea to our development; especially when it dominates the commanding heights of our economies.
It is here that ideological hegemony has inflicted its worst effect on the African psyche. African leaders and citizens believe that to develop we need FDI and foreign contractors. Their benefits seem obvious: they bring in capital and technology combined with new management and organisational skills. But these short-term benefits are often realised at the cost of either killing existing local firms or undermining their development. Yet given a chance, local firms can grow and accumulate the same skills and competences in the long-term.
History teaches us that all economies that graduated from poverty to riches actually had to pay for poor quality work and products by local firms at a high price. This was the necessary short-term cost in order to grow national firms like Toyota and Nissan in Japan and Samsung and Hyundai in South Korea. It took Toyota 20 years of government subsidies and three near bankruptcies for it to grow into what it is today; the second largest automobile company in the world. Its growth was a result of Japanese government banning Ford and General Motors from setting up motor-vehicle assembly plants in Japan in the 1930s.
But the African – leader and citizen – is convinced that we need high quality goods and services and lower prices NOW. Yet had Japan and South Korea made such a choice, they would not have Toyota or Samsung, and they would not be as transformed. Africa should be willing to pay the short-term price for long-term transformation.