FOUR BIG PUBLIC POLICY CHALLENGES FOR UGANDA
Presentation by Lawrence Kiiza, Director of Economic Affairs, Ministry of Finance, Planning andEconomic Development, Government of Uganda, to the course on ‘Policy Design and Implementation in
Developing Countries’ at the National Graduate Institute for Policy Studies (GRIPS) on 22 June 2007, Tokyo.

INTRODUCTION

It’s a pleasure to be asked to talk to you today about contemporary public policy
development issues. As post-graduate students we will be depending on you to takeup the plethora of challenges now mounting for public policy professionals. I might
add that there has probably never been a better time to be starting out on a public
policy development career. New issues, improved leadership, improved governanceand the demand for more performance oriented institutions that can compete in a
globalized environment are all adding to the importance of public policy and the skills
required for developing and managing it.

There is an unmistakable mood of change around the globe about the importance of
public policy in country stability, security and development. After decades, maybe
even centuries, of debate about the respective roles of the private and public sectors,
attention is now shifting towards more efficiency and effectiveness of public policy
administration and implementation. It’s a sort of convergence of ideologies. The
private sector now realizes that the public sector is vital to its growth prospects.
Infrastructure, security, health and education are just a few of the public assets andfunctions that the private sector depends on.

In a similar vein the public sector realizes the vital role of the private sector,
especially in investment, innovation and management. And what they bothincreasingly appreciate is that the more efficient each sector performs the better will
the other perform. A win-win outcome is now the main aim. Now that’s a big step
forward from the time when it was seen as almost a zero sum game, for example,
when public expenditure was cut it was once seen by the private sector as1

automatically meaning lower interest rates and better conditions for private
investment. Or when taxes went up it was seen as creeping socialism and erosion of
the private sector and working of a market economy.

Now we all are thinking more deeply about whether those increased taxes areneeded to fund critical investment in infrastructure with multiplier impact on theprivate sector or are they going to be frittered away on government consumption withno pay-off in the foreseeable future.
With this background, I wish to speak about how I see Uganda in the 21 st century
and taking into account where the country has come from and will also specificallyconcentrate where I would like to think our country will be positioned in 50 years fromnow and how we can get there.

The main message about is that today we have access or potential to accesstechnologies, markets, policies and capital like never before and Japan, hasdemonstrated just how quickly a country can recover, providing it takes time todevelop an effective strategy and then focuses on putting that strategy into action.

Today, Uganda is widely characterized as a country that went from “basket case to
success story”. Since 1986, Uganda has transformed from nearly a failed State as aresult of various brutal dictatorship, to a country that has achieved consistently higheconomic growth rates, significant reduction in poverty. The 2002 Uganda Populationand Housing Census show that now 31 percent of the population leave below thepoverty line compared to 58 percent 5 years ago. While this might not soundsignificant, in the context for Uganda this is no mean achievement.

Uganda remains a country of opportunities and challenges. From mid-1980s, thecountry undertook a series of structural adjustments with the support of IMF and WB.
These were mainly targeted at maintaining strong macroeconomic stability through2

appropriately tight fiscal and monetary policies, and implementing a program ofsubstantial economic liberalization (trade reforms-export taxes were eliminated andthe level and dispersion of import tariff together with exemptions were substantiallyremoved; the monopoly of all commodity marketing boards was eliminated, and all
price controls were lifted; the privatization program was accelerated and thegovernment divested either all or a majority of its shares in public enterprises;
financial reforms were undertaken; tax reforms to enhance revenue collections done
and creation of an independent revenue administration set up; civil service reforms
that saw reduction of civil servants reduction by 50% at the centre to accommodate
government decentralized program of relegating functions to local governments), lowinflation, a steady improving balance of payments, and an increasingly private sector
development.

Initially there were tensions between government and the Bretton Woods Institutions
over macroeconomic policy and the role of public sector. This impasse was resolvedin 1992, when after episode of fiscal discipline; the President strengthened theposition of unified Ministry of Finance, Planning and Economic Development bymerging the Finance Ministry and Planning Ministry. Thereafter MFPED began totake a more proactive role in aid management.

From this period, economic and fiscal discipline under a strong ministry enabled the
dialogue between government and its aid partners to move on from structuraladjustments concerns to more detailed considerations of development strategy andpublic expenditures. The structural adjustments targeted interventions that weremainly to alleviate social costs and concerns emerged about the need to address
poverty issues more comprehensively and to focus aid more effectively.

In 1995 Uganda’ developed its first comprehensive poverty reduction strategy- The
Poverty Eradication Action Plan (PEAP) and published it in 1997. The PEAP, now in
its fourth iteration, is widely regarded as a genuine, and government owned, poverty
reduction strategy that focuses on reducing poverty through economic growth and3human and physical resource development. The PEAP also provided a policy
framework with which donors could align. The PEAP is overall Uganda’s planning
framework. It guides medium term sector plans nation wide and local governments
plans. The PEAP is revised every 4years to reflect its implementation its medium
term policy contents vis-à-vis the long horizon objectives.

MFPED developed a system of medium term plans which linked aid and public
expenditure to the PEAP priorities.

Spending Ministries and agencies weredisciplined by cash budgets. The Medium Term Expenditure Framework (MTEF) was
developed to guide expenditure priorities in less hand- to- mouth way. Donors fully
participated closely in public expenditure priorities and reviews and in the formulationand management of sector-wide approaches (SWAps) in key sectors that eventually
linked to the MTEF. Disciplined macroeconomic management remained the country’s
cornerstone.

Donor relationshipAid flows measured to resources channeled through the budget are 8.2 percent GDP
and 38.7 percent of the public expenditure for FY07/08. In the past against thebackground of general discontent with aid effectiveness, Uganda became alaboratory of new approaches. It was a pioneer in MTEFs and SWAps, and the PEAP
was the forerunner of the Poverty Reduction Strategy Papers.

There has been corresponding changes with regard to how aid is delivered. Started
with balance of payments for structural adjustments and followed by debt relief underthe Heavily Indebted Poor Countries (HIPC) initiative that was linked to theestablishment of a Poverty Action Fund (PAF). Hence General Budget Support thatbegan in 1988, with the funding of the PAF, using notionally earmarked budget
support along side HIPC debt relief. This was allocated to priority poverty reduction
programmes through the budget, including earmarked sector budget linked to sector
programmes in education and then health.

4The introduction of the Poverty Reduction Support Credit (PRSC) by the WB in 2001
marked the full unearmarked GBS designed to support Uganda in the implementationof the PEAP. Uganda pioneered the use of general budget support operations under
PRSC. A number of donors joined in using this instrument in supporting the country’s
implementation programmes in poverty eradication. PRSCs are designed as lending
instruments to support policy and institutional reforms of the country and in case of
Uganda are a series of annual credits supporting a three year rolling program ofreforms based on PEAP targets.

We have made a lot of progress in strengthening the partnership between
Government and donors to ensure that we work together to achieve sharedobjectives. However some critical issues remain, which I wish to highlight.

i)the size of the fiscal deficit and its relevance for total Government
spending;ii)

improving the functioning of sector working groups;iii)

the emergence of “vertical funds”;

iv)

integrating donor projects into the budget process, and eventually into thesector ceilings.

FISCAL DEFICIT AND ITS IMPLICATIONS FOR GOVERNMENT SPENDING

Government spending has expanded very rapidly over the past years. Total
Government expenditure rose from 17% of GDP in 1997/98 to 23% of GDP last fiscal
year. This rapid expansion of Government spending has been made possible mainly
because of increased donor aid, including debt relief.

There has also been a downside to the rapid expansion of Government spending.
Domestic revenues have not kept pace with the rise in Government spending, and5hence the overall fiscal deficit – the difference between Government expendituresand domestic revenues – has widened very sharply. In 1997/98, the deficit was 6.7%
of GDP and rose to 12.3% of GDP despite our undertaking for fiscal consolidation.
The fiscal deficit for FY07/08 is 8.2 %.

There is a school of thought in the international community that widening fiscal deficit
is not a problem, because it is mainly funded by donor aid, and that Uganda should
continue to increase Government spending at a rapid pace and ask donors to financethis with more aid. It is argued that this will help Uganda to meet targets for theMillennium Development Goals.

Attractive proposal though certainly not fair for a country to carry on increasing its
expenditure at a rapid rate. It is our view that this is not a prudent strategy for
Uganda to follow, and that instead, should be moving towards to fiscal consolidation
over the medium term.

This does not mean that Government wants to turn away donor aid, nor does it meanthat Government spending will have to fall over the medium term. The implication ofthis is that the pace of growth of Government spending had to be slower over the
medium term, to allow stronger growth in domestic revenues to narrow the fiscal
deficit. Donor support has to be carefully targeted to productive sectors to enable
government build assets.

Clearly, slowing the medium term rate of growth of Government expenditures will
have costs for spending ministries and other agencies; but it is necessary for
Government fiscal consolidation to scale back the size of the fiscal deficit. There are
two main reasons.

First, the widening fiscal deficit is placing an increasing burden on monetary
management, because when Government incurs expenditure in the domestic

6

economy which is funded by donor aid, liquidity is created in the domestic economy
which must be mopped up by the Central Bank.

The Bank of Uganda mops up this liquidity by selling foreign exchange to thedomestic market or by selling Treasury Bills. But the sheer scale of liquidity createdby Government operations is starting to have adverse effects on the economy.
Liquidity created by Government operations increased more than tenfold over the last
three years, and because so many Treasury Bills have to be issued by the Central
Bank to mop up this liquidity, this is threatening to choke off the growth of banklending to the private sector.

The second reason is that the continued inflows of donor aid needed to finance thisdeficit cannot be guaranteed over the medium term. Although donor aid has risenover the last years, disbursements of donor budget support have consistently fallen
short of what was promised at the start of each fiscal year on the basis of donor
commitments.

Prudent budget management means that we should reduce our dependence on
sources of finance that are inherently volatile and cannot be guaranteed over the
medium term and increase the share of the budget which is funded from domesticallygenerated resources.

BUDGET SUPPORT MODALITIES AND THE SECTOR WORKING GROUPS

I now want to turn to the issue of donor support to the budget and how donors relate
to, and influence, spending plans in the budget.

General Budget Support7

Government’s preferred modality for donor funding is general budget support. Thismodality provides us with the greatest flexibility in setting our budget priorities.

Government recognises that some donors have difficulties in providing generalbudget support especially US, Japan and China.

Sector Budget Support

Some donors wish to earmark their support to specific sectors, such as education or
justice/law and order. Although we prefer general rather than sector budget support,
Government can accept sector-specific budget support funding provided that thefollowing conditions are met:-

the funding is for priority sectors with relatively large funding gaps andabsorptive capacity;-

Sector Wide Approaches (SWAps) and sector development plans are in placein the sector being supported, and-the support is mutually agreed upon by the line ministry, MFPED and thedonor through the yearly consultative budget process.

In principle, the absolute size of each sector’s budget, and its share in the total
budget, should be determined through the annual budget process, and be in line with
Government’s strategic spending priorities. The budget process allows ample scopefor consultations with all stakeholders, including the donors.
We emphasise the point that the best way for all of our development partners to
influence the sectoral ceilings as articulated in the MTEF is through their participationin the consultative budget process, rather than through trying to make sector support
strictly additional.

Sector Working Groups

8The Sector Working Groups are really the key to good budget planning at thesectoral level.

The Sector Working Group identifies, cost and rank the sector’s expenditure priorities,
and on that basis the relevant line ministry has to provide a budget submission,
during the budget process, which is consistent with the sector’s expenditure ceilingbut which also incorporates the highest ranking priorities of that sector.

All of these are examples of poor budget planning at the sectoral level which
undermined the rational use of scarece resources. If we are to improve budget
planning at the sector level, all stakeholders must work together to ensure that;i)

The Sector Working Group identifies the key priorities in its sector which
are set out in the Sector Investment Plan;ii)

The priorities are then reflected in the relevant line ministry’s budget
submission;iii)

The budget submission includes all of the sector’s non discretionary
expenditures, such as the sector’s wage bill.

iv)

Donors refrain from attempting to use their own funds, whether sector
budget support or project support, to fund expenditures which are notpriorities identified by the Sector Working Group and included in the Sector
Investment Plan.

VERTICAL FUNDS

I now want to outline Government’s thinking on the issues concerning Vertical Global
Funds. Vertical Funds are being set up by the international community as amechanism for mobilising financial resources for spending on priorities identified by
the international community. (global funds to fight AIDs, Tuberculosis and Malaria,
and Education Initiative)

9

Government’s view is that we welcome additional financial resources from theinternational community over the medium term, especially if that funding can besupplied on a predictable and sustained basis. However, we must ensure that any
money received from the Global Funds is used in a manner which is fully compatible
with our budget process, and do not undermine the budgetary reforms that we have
implemented over the last five years.

INTEGRATING DONOR PROJECTS INTO THE BUDGETThe final issue that I want to discuss relates to donor funded development projects.
These are currently outside the GOU budget and are not subject to the normal
budgetary processes of Government (Off-budget).

There are a number of problems related to the donor funded projects, none of which
are unique to Uganda.

First, because they are not fully integrated into the budget, it is difficult to ensure thatthese projects are consistent with sector priorities or that overall Government
spending, inclusive of the donor funded projects, reflects national priorities. Secondly,
it is not clear whether, in planning for donor projects, full account is taken of either
the counterpart funding requirement which must be met out from the Government
budget, or of the ongoing recurrent costs of the project which must also be met fromthe Government budget.

Thirdly, because the donor funded projects, unlike the GOU budget, is not currently
subject to a hard budget constraint, line ministries have an incentive to circumventthe constraint imposed by the sector expenditure ceiling in the MTEF by attempting
to fund expenditures through the project modality.

10Fourthly, we currently lack sufficient accurate knowledge on the magnitude andcomposition of the donor projects to evaluate their overall impact on the economy,
which is crucial for proper budget management.

Although Government would prefer that all donors provide aid in the form of budget
support rather than project support, we recognise that there are some donors who
cannot do this. It is however crucial that donor projects are consistent with theGovernment’s priorities, and are planned and budgeted for within the annual budget
process. This means that we must improve the way in we coordinate with therelevant donors in our budget planning.

In conclusion, Government managed to a large extent to integrate donor projects into
the budget to improve our budgeting system, encourage a further shift to budget
support and ensure that overall public expenditure is consistent with macroeconomic
stability.

We established sector ceilings that include both the GOU budget and donor projects
hence hard budget ceilings that do not accommodate, donor funded project is in thepipeline until the forth coming fiscal year. Over time we expect that this would
encourage the sectors and their partners in the donor community to shift moreresources into the GOU budget.

Overall the aid support has been fairly responsive to the specific conditions of
Uganda and have adapted to the evolving Poverty Support Eradication Program andsector priorities.

However, the original design was perhaps too optimistic about governance issues
and

there

was

a

bias

towardsthesocialsectors

neglecting

theproductive/infrastructure sectors.

11

Nevertheless, there is continuing impetus towards delivering aid more effectively; inkeeping with emerging ideas of good practices most recently expressed in the Paris
Declaration, hence the Uganda Joint Assistance Strategy (UJAS) that is a new
instrument that will define new working relationship between donors and government.

The issue is how the aggregate contribution of aid can be assessed in terms of its
financial effects, but also its influence on public policies and the development of
Uganda institutions and ultimately the country’s development being taken as adeveloping country.

As regards policy effects, aid has not been able to buy policies in Uganda, but has
been able to provide financial support for reforms once government became
committed to them. With regard to financial effects, aid has enabled the economy toexpand imports by more than growth in exports and government to expand public
expenditure by more than growth in domestic revenues.

Aid has had a further significant influence on strengthening of public institutions,
including those relating to the public expenditure management and accountability
functions of government.
What would have happened without aid? There is a critique that aid inevitably
undermines the domestic accountability of regimes and enables them to side-stepthe challenge of raising domestic resources!!

PROSPECTS

As demonstrated above, Uganda has undertaken most of the structural reforms,
improved its budgeting processes and donor coordination but growth remains low
and poverty levels are still high.

12

Uganda is currently working on improving measures to address constraints that will
support total factor productivity.

I would like to end with four big public policy issues that we are grappling with in
Uganda, policies that may constrain our development or unleash our economy tobecome perhaps the first ‘African Tiger’ economy.
• Policy execution.
• Resources policy.
• Domestic savings.
• Investment incentives

Policy Execution

Over many years we have given a great deal of attention to policy design anddevelopment. Fiscal policy to curb public spending, monetary policy to curb inflation,
overall macro-economic policy for economic stability and micro-economic policy tostimulate investment. Much of this has been successful… up to a point. In Uganda
we have inflation at around 6.5% and for the Sub-Saharan group of countries as awhole it’s about 7% (excluding Zimbabwe). Our current target in Uganda is to get
inflation to a maximum of 5%, which is a big improvement on where we were lessthan 20 years ago at almost 200% (Slide 1).

But over the recent past 5 years or so we seem to have stalled a little in our
performance. Inflation has crept up, just a little, but heading outside our target. GDP
growth has been acceptable, but we think we can do better (Slide 2). Much of ourcurrent attention in doing things better has been directed towards the creating an
economic environment that’s conducive to private sector investment and growth andthere are some signs of success. Investment has been growing by over 16%/year in
Uganda and now contributes a significant share of growth in GDP. For this year13

investment will be equal to 22.5% of GDP compared to 20.6% in the year before. We
have, however, a significant challenge in this area as we need to keep investment
growing by over 16%/year for some years with a target of over 30% of GDP. That’s
what’s required if we are to achieve a sustainable growth in GDP of more than
7%/year. We might just get there, especially if some of our resource prospects anddiscoveries (oil and minerals) turn into reality (see below for further on this issue).

The question I want to pose under this section, however, is how to improve policy
implementation. We all know quite a lot about the types of policies that give rise to
macro-economic stability and what to do and not to do with monetary and fiscal
policy. But it’s with implementation and execution of sectoral policies and budgets
that I have concerns and suspect that this is where we are not up to pace andpossibly it’s one reason why Sub-Saharan African performance lags other areas in
Asia.

There is nothing really new about the difficulty of implementation, regardless ofwhether it’s a public or private enterprise. Business enterprises have been working at
improved execution for years, perhaps forever because if they don’t get it right theybasically don’t exist. If there is one thing that distinguished the leading companies(that is, Toyota, Honda, Mitsui etc.) in the world from the rest it’s their implementation
skill, their ability to execute decisions with precision and make things happen exactly
as planned. I think public policy implementation has not kept pace with that of theprivate sector, at least the leaders in the private sector.

Until we have policies being executed with precision we cannot be satisfied. All theG8 aid in the world will count for little if the systems of public expenditure
management don’t improve to enable those extra resources to be converted into
actual development spending and real investment. And that’s the big challenge
because, as you people well know, if the investment expenditure impact is diluted
then so also does the future output from that expenditure become diluted. The people
say why hasn’t growth improved after all that expenditure on infrastructure?

14

Solutions don’t rest merely with an increase in what we call the out-turn ratio, that is
the alignment of actual with approved budgets. There is much more to it thanmeeting the conditions for disbursement and making the disbursements inaccordance with agreed budgets.

What we are really after is better evidence that public spending is actually being
converted into real investment and increased quality and quantity of services. We
know there are leakages of funds whenever we make transfers and that waste andcorruption are characteristics that need better attention. Uganda itself ranks poorly(ranked 100 out of 125 countries) on institutional strength in the World Economic
Forum’s Global Competitiveness Report. Some among us glibly dismiss this ranking
as nothing but perception, its not reality and therefore we not worry about it. But,
reality or not, perceptions matter. They affect the attitudes of our investors, ourlenders, interest rates and our donors and their willingness to invest in us.

The public expenditure tracking survey (PETS) was an innovative way of moving
down the public expenditure supply chain to capture the views of the intended
beneficiaries of public expenditure at the frontline.

This survey styled solution captured data that provided insights into the quantity andquality of service outputs, inputs actually deployed within facilities, financing,incentives, management systems, community participation and staff attendance orabsence. We might not have liked the results of some of this research or some of thesurvey responses given to the World Economic Forum, but that’s the reality.1

Even with this survey styled data it remains a challenge to respond quickly to thedata and implement practical policies to correct these inefficiencies in public
expenditure. We can talk about them, highlight them in reports and speeches and1

The 2006-07 Global Competitiveness Report had Uganda ranked 122 out of 125 countries on diversion of
public funds; 120 in favouritism in decisions by government officials and 112 in wastefulness of government
spending.

15

have them discussed in parliament. But the execution process to reform can be slow,
too slow for my liking.

One measure that I am examining is having a formal policy implementation andmonitoring plan with an accompanying ‘best practice’ guide to implementation andmonitoring, so that we start to impose some implementation hurdles on our policies
and our different agencies and departments. It seems to me to be quite unproductive
to be coming up with various policy initiatives that fail basic implementation tests.

At least we should have some indicators about the risks associated with policy
initiatives. Government agencies and departments would have responsibility forensuring their implementation plans exist and that there is then effective monitoringof them, with corrective actions ready when progress doesn’t match expectations.
Again, I am not talking here about outturn ratios as measures of implementation
performance.

As students of public policy I would like to leave you with the challenge of identifying
practical ways and real performance measures for improving the policy execution
process and speeding up the reform process, especially when we know there is aproblem, but lack execution or implementation skills to turn it around in a reasonable
time. Unless we come up with some practical solutions in this area I fear our donors
and lenders may lose patience with our progress.

Resources Policy

Uganda is an interesting country, maybe even a luck country. It has relatively highand reliable rainfall, a pleasantly stable temperature, water, fertile soil and now,
maybe, some oil and minerals. Resource discoveries have implications for manythings in an economy including the macro-economy, micro-economy, political
economy, regional development and adjustment pressures. There is a long history of16resources booms and their often-inevitable busts across many countries. Many ofyou will be aware of the so-called Natural Resource Curse showing countries wellendowed with natural resources seem not to perform so well. If the oil and mineral
discoveries of Uganda are converted into reality then we could be poised for a surge
in investment and eventually exports. The change will then be to manage our
economy to ensure we take advantage of the opportunity, but at the same time
guard against the destructive influences associated with wildly fluctuating economies.

Uganda also has some strengths in policy guidelines like the Poverty Eradication
Action Plan (PEAP) (now under review). PEAP offers political consensus andauthority, which are crucial for effective laws and governance. If PEAP principles canhelp create effective petroleum and mineral laws, with improved governanceregulations enforced at both a national and local community level, then there could
be a smooth transition to a growing industry sector in Uganda. This could put us on
the path to a sustained high growth level, perhaps even 8%/year. Nevertheless, if
petroleum and mineral revenues do go up sharply and/or fluctuate wildly there can beequally volatile performance in the macro-economy, especially in a small economy
like that of Uganda.

Best practice laws and regulations cannot stop the workings of a market economy
that’s sending signals, sometimes harsh ones, about where to shift resources. For
example, the best staff is often induced to switch from government to resourcecompanies and their suppliers. This can present big problems for countries that lack
depth in their technical departments, training capacity and a general strategy forsuccession planning.

Some countries (e.g. Alaska, Azerbaijan, Norway, Kazakhstan and proposed for
Iraq 2 ) have established special ‘oil or petroleum funds’ to absorb the surplus
revenue of resource booms, and accompany them with careful rules about their

2

Palley T.I. 2004, ‘Combating the Natural Resource Curse with Citizen Distribution Funds: Oil and the Case of
Iraq.’, Foreign Policy in Focus, December

17

application to savings and expenditure. On that note, here is my second challenge foryou as students of public policy. What is the best mix of policies for dealing with aresources boom in a less developed economy and, how do we go about effective
implementation.

Domestic Savings

My third public policy challenge for you is in designing policies to stimulate domestic
savings. By way of background we have in Uganda a very low domestic savings ratio(Slide 3), when compared to the Sub-Saharan group, the World and especially thiscountry.

Our National Budget Framework Paper FY2007 states: It is the longer-term aim of
the Government to gradually shift our savings reliance from official development
assistance towards our own savings from households and business. The domestic
savings ratio is far too low, compared to other countries and especially the highgrowth group that Uganda aspires to be part of. The advantage of domestic savings
driven investment is its inbuilt commercial sensitivity to capacity constraints andbenign effect on the exchange rate. Furthermore, empirical evidence has shown thatcountries which rely more on their own savings and private sector investment
experience higher levels of growth.

By way of background it’s relevant to observe that Uganda has among the highest
fertility and population growth rates in the world. This has implications for GDP/capita
and in savings/capita (Slide 4). The challenge then is to design effective public
policies to bring about higher domestic savings in Uganda. What role does taxation
play in this? What about family planning and education? What about the size of theinformal sector? Uganda has one of the largest informal sectors in Sub-SaharanAfrica. These are just a few public policy questions that need investigation.

18

Investment Incentives

I have described above the vital role of investment in growth. As you know thecontribution of investment to growth in GDP depends not just on the expenditure on
capital items, but even more fundamentally on the output it generates. The
Incremental Capital Output Ratio (ICOR) has been exceptional in Uganda for sometime (1.8 from 1992-96 and 2.2 over the past decade). But over the last two years it’s
crept up above 3, compared to 2.75 in 2004-05, meaning it’s taking more capital togenerate the same level of output than it did a few years ago.
Investment can generate an increase in GDP through either an improved ICOR or
through a higher share of output being invested. There are strong linkages between
public and private investment, especially when infrastructure is a binding constraint to
private sector development and investment as is the case in Uganda. These linkages
and the empirical evidence of high returns to investment in Uganda underline just
how important it is for high quality investments to be undertaken in both the public
and private sector. When low quality investments are undertaken the ICOR
performance is compromised with spillover effects on growth in GDP and income
levels.

Low quality investments can arise from subsidies and ad-hoc concessions thatinduce under-performing investments to take place at the expense of unassisted
investments with higher returns. They can also arise from poorly selected,
inefficiently designed and poorly managed public investment. The effect of a low
ICOR is that a higher level of investment has to take place to reach the same rate of
growth in GDP and ultimately this can compromise the ability to reach GDP growth
rates and reduction in poverty.

This brings me to my final public policy challenge for you. Is there a useful role forinvestment incentives in stimulating growth and what types of incentives might be19

considered positive incentives. By positive incentives I mean those that result in amore efficient allocation of resources than would have occurred otherwise.

On this note I conclude my presentation. I am hopeful that the above policy
challenges may stimulate some of you to examine them in further detail. Moregenerally, however, I hope I have been able to stimulate your general interest in
answering the vast challenges in public policy development.

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Slide 1: Inflation Rates (CPI): Uganda:
1988-2008
200
180
160
140
120
% Change in CPI 100
80
60
40
20
0
1988

1992

1996

2000

2004

2006

Slide 2: GDP Growth: 1988-2008:
Uganda and Selected Country Groups
12108% Change GDP

6
4
2
0
-2
1988
Uganda1992

Sub-Sahara

1996

2000

East Asia & Pacific

1004

1008

South Asia

21

Slide 3: Gross Domestic Savings: % of GDP: Averagefor 4 years ended 2003
30
25
20
% of GDP 15
1050

Sub-Saharan Africa

Uganda

World

Japan

Slide 4: Correlation Between Fertility, Savings & GDP: All
Countries: 2002
0.356
0.4
0.3
0.2
0.1

-0.4610
correlation
-0.1
-0.2

-0.109-0.3-0.4-0.305-0.5
Fertility & Savings

Fertility &GDP/capita

GDP/capita &savings

Fertility & grosscapital formation

Slide 5: Incremental Capital Output Ratio 2003/04 to
2006/07
4
3
ICOR 2

1
0

2003-04

2004-05

2005-06

2006-0722