# 1. Introduction

Poverty in Uganda has fallen substantially over the past 20 years. From 1992 to 2005, the proportion of the population living in poverty declined from 56.4 percent to 31.1 percent. This can be partially traced to a “peace dividend,” or the impact of the restoration of political and economic stability following the conclusion of the Ugandan civil war, which raged from 1980 to 1986. Peace in the Northern region was accompanied by a package of liberalization reforms introduced by the new administration and engendered a positive response from firms and households to stability. Poverty continued to decline at a slower rate during the period 2005-2012, reaching 19.7 percent in 2012(see Figure 1a). The average rate went down from 2 percent a year (for the period 1992-2005) to 1.5 percent a year (for the period 20052012) as pointed out by the latest Uganda Poverty Assessment Report (World Bank 2016), mainly as a result of slower overall economic growth.

The poverty headcount index increased modestly from 19.7 percent of the population in 2012 to 21.4 in 2016. The increase in the poverty headcount index measured at the international poverty line - $PPP (2011) 1.90 per capita per day) - was more noticeable, going from 34.6 to 41.6, indicating a considerable proportion of households clustered on both sides of this line. This represents a reversal of the downward trend observed since the early 2000s. Two factors can help explain this reversal. First, the overall sluggish economic growth observed since 2012; GDP per capita grew only 1.1 percent per year on average between 2012 and 2016 (while between 2005 and 2009 it grew at 4.5 percent per year on average). Secondly, the drought that affected the country for the better part of 2016 and 2017 negatively affected the consumption of rural households, and rural poverty went up.<sup>2</sup> Poverty in urban areas has remained unchanged since 2009, at a level of around 9 percent, which shows that the purchasing power of urban households has been stagnant for the last decade.

Going forward it seems that higher economic growth will not be enough for poverty reduction as the responsiveness of poverty reduction to growth has declined: poverty-growth elasticity<sup>3</sup> fell from -1.24 for 2000 to 2016 to -0.5 for the period 2009 to 2016 (see Figure 1b). The implication is that even if economic growth recovers over the medium term, further poverty reduction will require a stronger focus on inclusive and equalizing policies.

Consumption growth between 2012 and 2016 brought disproportionate increases for the middle class and rich households, contributing to a more uneven distribution of resources. Inequality, as measured by the Gini index, increased from 0.40 in 2012 to 0.43 in 2016 (see Figure 1c). This represents a shift away from the broad-based economic progress observed during the period between 2009 and 2012, when inequality declined. Overall, the country has not been able to make significant progress in reducing consumption inequality for over a decade. While inequality reduction is often pursued for its own sake, it has also been shown that elevated inequality slows economic growth and has negative effects on sociopolitical stability (Berg and Ostry, 2011; Ostry, Berg and Tsangarides 2014).

> 2 This is linked to the fact that many of the rural poor depend on their agricultural production for their own subsistence. 3 The elasticity of the poverty headcount rate under the international poverty line to GDP per capita growth.

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