Why, in spite of our continued poverty, there is good reason to celebrate our gains as we plan ahead
THE LAST WORD | ANDREW M. MWENDA | Last week, President Yoweri Museveni gave his State of the Nation (SOTN) speech. He gave interesting facts about Uganda’s economy, which many of our “intellectuals” deny. Between 1986 and 2015 (when I have reliable data), Uganda’s economy grew at an annual average rate of 6.92%. Given that population growth has been 3.3% over the same period, per capita output has grown at an average annual rate of 3.62%. This is an excellent performance by both contemporary and historical standards.
Some Ugandans have argued that this rate of growth is below our country’s potential. One economist has even wondered why we should be celebrating 6.92% growth when that is considered slow-down in China. But surely, should every good runner be judged by the standards of Usain Bolt? Should we consider Mo Salah a poor player because he has not reached the heights of Messi and Ronaldo? In any case, what is in Uganda’s potential that would have made our country perform better than China in economic growth rates?
Nearly all the rich countries of today are rich not because they grew fast but because they grew slowly and steadily over a very long period of time, lasting generations. For instance, the USA has one of the highest per capita GDP in the world. But its annual average rate growth rate between 1900 and 2000 was only 2%. Between 1913 and 2012 (a whole 100 years), average annual GPD per capita growth of Europe was 1.6%. Ugandans are asking their country to perform miracles. It is good for us to aspire to have per capita income growth of 10% over 100 years. But such aspiration in very unrealistic since no country has ever performed such a feat. The lesson is simple but fundamental: there are no shortcuts to development.
The best measure for Uganda is to look at its position in global and regional rankings; both historical and contemporary. Between 1986 and 2015, Uganda was the 17th fastest growing economy in the world, 4th in Africa. If we exclude mineral rich countries from the sample (for the simple reason that they are enjoying God’s or nature’s bounty), it is 11th globally, first in Africa. Without having to repeat Museveni’s speech, the geographical context of Uganda in a troubled region makes this achievement remarkable.
Historically, few countries have sustained the GDP and per capita GDP growth that Uganda has enjoyed over 30 years. Only West Germany after World War Two did an average of 3.8% in per capita income growth over 30 years. Uganda is beaten by the Asian economies, which averaged 5.6% between 1960 and 1990. But this is largely on account of our exceptionally high rates of population growth. If we had averaged 2% population growth rates as Asian nations did, our per capita growth would have been 5%.
Yet in spite of her impressive performance, Uganda is still extremely poor. With a per capita GDP of $724, we are among the bottom poorest countries in the world, 176th out of 187 countries in the International Monetary Fund (IMF) rankings in nominal dollars. However, when measured using Purchasing Power Parity (PPP), which Museveni wrongly called a “shortcut” during SOTN, our per capita output is $2,500 and our rank is 159th out of 187 countries.
In fact, using nominal dollars to calculate a nation’s income is lazy. Just imagine a person earning $1,000 in Kampala and another earning the same amount in New York. On the face value of the dollar bills (which economists call “nominal”), the two earn the same income. But when it comes to the basket of goods and services the same dollars can buy in Kampala and in New York, it is different.
One way of expressing this is to say that the cost of living in Kampala is lower than in New York i.e. most of the things a person needs to live on (like paying rent, buying food, hiring a maid at home etc., renting a boda, eating in fancy restaurants, getting a haircut, consulting a doctor, etc. are much cheaper in Kampala than in New York. When we convert $1,000 at market exchange rates, a Ugandan earning Shs3.8 million can buy much more than his/her counterpart in New York.
Thus, according to the latest IMF estimate, one dollar in Uganda has a purchasing power of $3.45 in America. So, if we take a basket of goods and services that people buy, prices would be the same in Uganda and America if the exchange rate were Shs1,100 to the US dollar. This is, therefore, the “correct” exchange rate that should inform our calculations. PPP is a more reliable estimate because Ugandans spend their income in Uganda and on things whose prices are really low. Market exchange rates are volatile.
For instance, about two months ago, the exchange rate of the shilling to the U.S. dollar fell from Shs3,800 to Shs 3,500 i.e. by about 7%. That is big, but did it really change much in the prices Ugandans pay for most of the things they depend on the live – food, transport, medicines, haircuts, school fees etc.? Today, it has again appreciated to Shs3,780 without significantly impacting prices of most of the goods and services that Ugandans spent on. The advantage of PPP is that it is much more stable than market exchange rates and deals with values as opposed to prices.
As a caveat, I am aware that there are many weaknesses with the PPP method, which I should not delve into because they will divert us unnecessarily. Suffice it to say that some economists give PPP a margin of error to the tune of 5-10% and sometimes more. Yet even with all its weaknesses, PPP is not a shortcut as Museveni said. It is a much more realistic measurement than nominal dollars.
To illustrate this point further, if Uganda ended its absurd tax claims on oil companies, and let them move towards the Final Investment Decision (FID), that will ensure an influx of huge volumes of dollars into the country. This investment will be to the tune of US$12 to 15 billion. Even with high import content, such investment can appreciate the value of the shilling to $2,700 to the dollar. Hence even without changing anything on the ground, our per capita GPD in Uganda would rise from the current $724 to $1,018 i.e. we would achieve the proverbial “middle income status.”