Emmanuel Tumusiime-Mutebile: Achieving middle income status by 2017
- prospects and challenges
Remarks by Mr Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda, at the
First Economic Dialogue on the Vision 2040, Kampala, 26 August 2013.
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1. Need for a realistic time scale
The World Bank defines middle income countries in terms of Gross National Income (GNI)
per capita, with a lower bound of $1,036 for lower middle income countries. Uganda's GNI
per capita was $510 in 2011. To attain the minimum threshold of $1,036 for lower middle
income status, Uganda must double its GNI per capita in real terms. With real GDP growth of
7 percent and population growth of 3.2 percent, per capita incomes will grow at 3.7 percent per
year. At this rate of per capita income growth, it will take 19 years for Uganda to double its real
income per capita. It is, therefore, clearly not possible for Uganda to double its real income by
2017. A more realistic target would be to reach middle income status by the early 2030s.
To achieve middle income status, Government needs to adopt a long term approach to
economy strategy, focusing on the policies which can generate sustainable high rates of
growth for the next 20 years. Uganda has established a good track record of macroeconomic
management over the last two decades. It is imperative that macroeconomic stability is
maintained over the long term, which means that demands for public spending must be
accommodated within the available budget resource envelope so that public debt remains
sustainable and does not crowd out private sector borrowing from the banking system. But
macroeconomic stability is a necessary but not sufficient condition for sustainable growth
over the long term. It must be combined with structural reforms which strengthen the supply
side of the economy, enabling the economy to generate growth in productivity. There are
three crucial areas pertinent to the supply side of the economy where Uganda needs to do
much better if it is to achieve middle income status and transform the structure of its
economy. These are: i) the modernization of agriculture; ii) accelerate the demographic
transition and iii) raise private sector investment rates.
2. Modernisation of agriculture
There are very few developing economies, other than city states, which have successfully
transformed their economies and reached middle income status without modernizing their
agriculture. Agricultural modernization is a prerequisite for industrialization, for three reasons;
i) to generate agricultural surpluses which can then be used as raw materials in
agroprocessing industries; ii) to free up labour for employment in modern industries, and iii) to
create a rural market for the products of domestic industry.
Uganda formulated the Plan for the Modernisation of Agriculture in the 1990s but this has not
been implemented effectively with dire consequences for the performance of the agricultural
sector. Labour productivity in Ugandan agriculture is among the lowest in the world. Most of
the smallholder food crop sector is characterized by subsistence farming, with no use of
modern inputs.
The strategic objective of agricultural policy should be to help Uganda's smallholders to
adopt good agricultural practices, produce more output for the market and to start to use
modern farm inputs. The first step towards agricultural modernization is an effective
agricultural extension service which can reach the mass of smallholder farmers and
encourage them, through technical advice and demonstrations, to adopt good agricultural
practices. The returns to investing in modernizing smallholder agriculture are potentially
huge. The combination of adopting good agricultural practices and low input technology
could enable smallholders to double their yields, which would raise farm incomes and
generate marketable surpluses. It is a mistake to believe that Ugandan agriculture can be
modernized by focusing on large scale commercial farms, rather than smallholders. Given
the structure of agriculture in Uganda, which is dominated by smallholders, large scale farms
are never likely to account for more than a small share of farm output. Furthermore, yield per
area of land in Ugandan agriculture is inversely related to farm size; hence replacing
smallholder agriculture with large scale farms is likely to reduce total farm output.
3. Accelerate the demographic transition
The demographic transition plays a key role in economic development. No developing
country has achieved middle income status and structural transformation of the economy
without undergoing a demographic transition. A demographic transition entails a fall in the
total fertility rate, which reduces the population growth rate and the pulls down the
agedependency rate.
Uganda has only just begun its demographic transition. It has a total fertility rate of
6.1 children per woman and so has one of the highest age-dependency rates in the world, at
over 100 dependents per people of working age. Many of the fast growing economies of
developing Asia have age-dependency rates of around 50, because they began their
demographic transitions several decades ago. Lower age-dependency rates are closely
correlated with higher savings rates and greater real spending per person on human capital
development, which is crucial for structural transformation, because it allows an economy to
invest in physical and human capital.
Uganda's demographic transition has stalled because insufficient effort has been devoted to
population policies. Across the developing world, in countries with diverse cultures (e.g. Iran,
Malaysia, Sri Lanka), fertility rates have been brought down because Governments actively
promoted smaller families, made contraceptives available to all the population and invested
in reproductive health and women's education. Uganda should follow these examples and
prioritise population policies to reduce the fertility rate as quickly as possible.
4. Private investment in labour intensive modern industries
Uganda's record of attracting private investment into labour intensive industries such as
manufacturing is poor, which is one of the reasons why so few formal sector jobs in medium
and large scale enterprises are being created. The essence of structural transformation is a
large shift in the labour force out of low productivity, informal, traditional activities into
modern, formal sector industries with higher productivity. This is what is driving structural
transformation in developing Asia. However, such a shift in the labour force is only possible if
there is private investment in the modern sector, to create jobs in high productivity industries.
Private investment rates in Uganda are around 20 percent of GDP, but this is only half the
private investment rates in developing Asia. Uganda's policies to boost private investment
have been ad hoc and ineffective. Fiscal concessions, such as tax holidays, by themselves,
are not an effective tool for raising the overall rate of private investment, even if they are
successful at attracting investment in a few individual cases.
To boost private investment, many different aspects of the business environment must be
improved, to reduce the cost and risks of doing business in Uganda. These include: reducing
the regulatory burden on business and the burden of lengthy customs procedures for
exporters and importers, reducing the burden caused by demands for corrupt payments,
strengthening the legal system to resolve commercial disputes fairly and expeditiously and
improving the infrastructure in the transport and power sectors. Because the Ugandan
domestic market is very small, the country will become a much more attractive destination for
private investment only if firms located in Uganda can serve the entire East African market.
But this will only be possible if non tariff barriers (NTBs) to intra-regional trade in the EAC are
removed. The customs union in the EAC has not yet been properly implemented because a
multitude of NTBs are still in place, slowing down trade across borders within the region.