African elites are victims of their own delusions about distorted history of developed countries
On Dec.01, I attended the Joseph Mubiru Memorial Lecture hosted by Bank of Uganda and featuring Prof. Ha Joon Chang of the University of Cambridge. A brilliant economist lecturer, Ha is one of the smartest unorthodox thinkers. I owe him an intellectual debt because his work has influenced my thinking. Three of his books – `Kicking Away The Ladder, Bad Samaritans and 23 Things They Don’t Teach You About Capitalism’ – are must reads. Ha empasised the importance of industrialisation for any country seeking to become rich.
His lecture came four days after President Museveni invited me to State House to discuss manufacturing. He asked me to go see how, with available electricity, factories are springing up in the Namanve Industrial Park of Kampala.
Despite the surge, in reality Museveni superintends over an economic bureaucracy; especially in the Ministry of Finance and the Central Bank, whose ideological leanings are hostile to the idea of industrial policy. Even many Ugandan elites who are sympathetic to industrial policy are hostile to its implications. This explains why Uganda has not pursued an industrial policy. Uganda’s industrial policy is to have no industrial policy. This had led Museveni to constantly make ad hoc interventions to support this or that investor whenever reality confronts him.
Yet there is no country in the world where agriculture employs 80% of labour that has a per capita income of more than $1,000. So dependence on agriculture is synonymous with poverty. And save for finding huge rich mineral deposits and managing them well, no country has jumped from an agricultural to a service economy and become rich. Uganda must industrialise if it wants to become rich. So I told the President that while investments in infrastructure; dams, transmission and distribution lines for electricity, and roads, expressways, railways, water systems and airports are absolutely necessary, they are insufficient to drive the manufacturing growth Uganda needs.
Instead, there is a toolbox for industrialisation from historic experience that Uganda can pick from.
First, the leading manufacturing firms in the sectors Uganda considers necessary for her transformation must be owned by Ugandans. This is because, as a rule, multinational corporations do not transfer the most valuable aspects of their business to their subsidiaries. Ha repeated this point. Otherwise we can assemble but will not be able to manufacture goods. Why?
Countries that have developed did so by selling abroad more value than they bought from there. In economics it is called terms of trade. And international trade is a form of hierarchy: some countries produce cotton; others weave cloth while others market high fashion. Some nations mine iron ore; others make steel while others sell automobiles. How much you earn from international trade depends on the niche you occupy in this value chain.
Those who produce and sell raw cotton earn 1.9% of the international market price; those who weave cloth take about 12%, while those who sell high fashion like Louis Vuitton, Gucci or Hugo Boss take 65%. The same applies to the niche one occupies in the value chain of iron ore, steel, and automobiles. Being relegated to a producer and exporter or raw cotton or iron ore means remaining poor. This has powerful implications on politics and the welfare of your citizens.
Take the iPhone. On its back it says: designed in California, assembled in China. Design and marketing, which are done in the USA, take 65% of the value of the iPhone. Assembling takes 15%. This is why China is developing her own smart phones in order to capture the 65%. DR Congo that sells Coltan from which these phones are made gets about 2%. So America eats the iPhone dinner, China the leftovers while DRC gets crumbs.
Second, if we are to industrialise, then we have to adopt industrial policy to protect our infant industries from international competition. Such policies would include tax holidays, subsidies, access to cheap long-term credit, free prime land, high tariffs on imported substitutes etc. This places the state in a position to choose which sectors, firms, and individuals to get these benefits.