Uganda wants to manufacture cars. It doesn’t have any comparative advantage in this field. It does not produce iron ore from which to make steel, an important input into the car manufacturing industry. It is landlocked. It has no prior experience in manufacturing anything significant. And it is trying to do it using a state owned enterprise, Kiira Motors Corporation (KMC), in a government riddled with corruption and incompetence.
For many observers, this is a toxic combination that produces economic disasters, right? Yet I think Uganda should try. The heading of this article is drawn from the title of a 2003 book by an economics professor at the Massachusetts Institute of Technology (MIT), Lester Thurow. It is MIT that initiated the project that produced the innovation that Kiira is trying to turn into a product and a business. Kiira’s journey seems improbable but that is how transformative projects that have altered the course of history initially seem.
Take the example of Japan, the country from where I am writing this article. When it sought to enter the automotive industry in the 1930s, it seemed improbable. Japan did not have iron ore. It lacked technology. It had to first pass a law that only companies majority owned and controlled by its nationals could sell cars in the country. Yet it did not have a comparative advantage in manufacturing cars. American and European automobile firms were so advanced they could supply Japan with high quality cars at lower prices.
Yet Japan took the bold step. In 1932 it banned American Automobile companies, Ford and General Motors, from establishing assembly plants in the country. Look at Toyota, the world’s second largest automobile company. According to David Magee’s book, How Toyota Became Number One, its first vehicles had numerous quality issues, the manufacturing process was rudimentary and the company was not competitive in global markets. Its first products were a little more than modified versions of Chrysler, Ford and General Motors vehicles.
For the first 20 years Toyota could not break-even. So it depended on subsidies from the Japanese government. In its first seven years, it produced only 1,500 cars. Its first entry into the USA market was a disaster and after three years and severe losses it withdrew the model it had taken there. Three times in its life in the 1950s it came close to bankruptcy, three times the government of Japan rescued it. Toyota grew to become number one (now number two) because the Japanese people and government believed in it.
The story of Japan’s rapid economic development is a story of many improbable journeys. When it entered the computer industry in the 1960s, Japan seemed to be undertaking a mad man’s dream. American computer companies like IBM were the world champions. Japan’s companies like Toshiba were mere mosquitoes, to use the words of Peter Evans in his book, Embedded Autonomy: States and Industrial Transformation. But again, Japan took the bold step and by the 1990s it was dominating this industry.
The story of Japan’s industrial transformation is the story of all late developers. Comparative advantage is not just based on initial endowments. It can be actively constructed. When South Korea sought to enter the automobile industry in the 1960s, it established the Pohang Iron and Steel Corporation (POSCO), a state enterprise. Its American benefactors said the country lacked iron ore and technology and was using the state to produce steel, a recipe for disaster. South Korea insisted and forged ahead. By 2000 when I visited the country, POSCO was the most successful steel company in the world, knocking the living daylights out of privately owned American steel firms in global market.
Today we look with awe at Sam Sung, Hyundai and LG, forgetting that when it started her journey, it seemed a pipe dream. Fortune favours the bold. There are one million reasons why Kiira may fail. There are three reasons why it should succeed. Kiira should be given a chance for only those three reasons. Uganda needs to be bold and throw everything at it and at other projects.
There will be mistakes and blunders along the way. There will be corruption, incompetence and fraud. It is not these scandals that will kill Kiira but how we respond to them as a country. We can choose to use such problems as opportunities to grandstand and score political points and prove our initial claims that this KMC was a pipe dream, a pet project by President Yoweri Museveni to steal or misuse public funds. Or we can choose to see such problems as opportunities to learn and improve how we do business.
The difference between successful and failed countries is their attitude to the challenges they face in the initial stages of developing an industry. For instance, it is politically appealing and psychologically gratifying to take a populist stand on such issues and condemn public officials for misusing public funds and call for an end to public financing of a government project. But this is rarely the right thing to do. On the other hand it requires quiet tenacity and patience to build an industry from scratch; especially when the journey is riddled with fraud and incompetence.
Yet the history of all successful projects, even political ones, always seems improbable. Take Museveni’s political journey as an example. Imagine him and his motely crew of 42 youths with 27 guns and hardly any experience in war heading to the bush to begin a revolution against a trained army backed by a foreign power, Tanzania. Their first attack on Kabamba was a failure. Their initial years were characterised by little progress. By 1983, they came close to annihilation and even discussed leaving Luwero for the Rwenzori Mountains. But they persisted and finally won.
Museveni has proved daring in his pursuit of power but been excessively cautious in his pursuit of economic development. Where he believed in the capacity of Ugandans to liberate the country politically, he believes in foreign investors – Indians, Europeans, Americans, Chinese and Arabs – to liberate Uganda economically. Instead of using the state to support private business initiatives by Ugandans, he has been giving tax holidays, prime land and other state benefits to foreign investors. In venture capital, only one in ten projects they finance succeed. If the failure rate by private venture capital is 90%, why should the state in Uganda not take a risk on Kiira and other innovations by our youths?