Wednesday, February 1, 2012

UGANDA’S ECONOMIC CRISIS SOWN IN COLONIAL TIMES

The decision to not make Uganda a settler colony, the nationalization of companies, the expulsion of the Asians and the liberalization of the economy under the NRM are arguably the biggest decisions that continue to reverberate through the economy.

Fifty years after independence services account for about half of GDP, industry 25.1% and Agriculture 22.2%. As economies develop, agriculture significance reduces as manufacturing and services not only create more value from agricultural commodities among other things but also that manufacturing and services employ more and more.
In Uganda however Agriculture employs four in every five workers while industry employs five percent and Services about 13% according to 2009 estimates.

What this means is that the overwhelming majority of Ugandans have been left behind by the economic boom of the last 26 years as most of the growth has come from the services and the manufacturing sectors.

To ferret out the root of this problem you would have to go back to the beginning of the last century to see how this came about.

Sir James Hayes Sadler, who was a commissioner of Uganda between 1901 and 1907, decided that Uganda was not attractive for human settlement. The hot humid climate, which came with malaria infestations and the tse tse fly, he decided should best left to the Africans. The tse tse fly and the distance from the sea, would make commercial agriculture untenable.

Sir Hesketh Bell, who came after Sadler, was also sold on the idea and did little to encourage European settlement.

While in neighbouring Kenya the temperate climate of the highlands straddling the rift valley were more suited to the settler and with the large unoccupied tracts of land could engage in commercial agriculture.

The repercussions of this single decision – despite massive pressure from certain quarters to allow for European settlement a la Kenya, is that our tenure system was not regularized.

To do commercial agriculture you cannot afford a disparity of the tenure system that currently exists in Uganda, but not in Kenya or Zimbabwe or South Africa, British colonies on the continent. In these colonies all the arable land is titled meaning it can be verified, transferred or collatralised. Land becomes a commodity and attains commercial value.

So in the wish to develop Uganda as an African state small holders farmers were used to plant cash crops – cotton, coffee and tea. The introduction of poll tax and the harsh penalties one would incur if they did not pay, served as incentive enough for farmers to grow cash crops.

So successful was the cash crop economy, mainly due to cotton, that the British treasury stopped subsidizing the Uganda administration in 1914.

Shut out of production the European and Asians found themselves restricted to the commercial and processing side of agricultural produce.

If Sadler and Bell thought there were doing the African a favour by keeping settlers off the land the unintended consequence – or was it?, is that the European and Asians ended up controlling the more lucrative parts of the value chain.

As a result by the 1970s a handful of families – mostly Asian, controlled more than a third of the economy of Uganda.

Milton Obote, with his move to the left attempted to redress this by nationalizing enterprises, reasoning that by having the government hold and run this assets in trust for Ugandans would redress the wealth disparities.

Analysts of the time say his slap dash nationalization policy argue that Obote “disenfranchised the non-citizens who run the economy without empowering the Africans who had not been allowed to participate in commerce, industry and large-scale agriculture” – a recipe for disaster.

His successor Idi Amin while becoming increasingly isolated from his erstwhile sponsors, especially the British, and hoping to bolster his local support expelled the Asians in 1972 at the height of his economic war.

The vacuum caused by these efforts at “nationalization” accelerated the economy’s down turn. In his native wisdom Amin sought to slow the slide by publicly executing or torturing people involved in economic crimes – hoarding, smuggling, overcharging and dealing in foreign exchange.

The extent of the destruction of the economy is captured by the fact that of the 930 registered in 1971 only 300 remained by the time of Main’s demise in 1979 operating at five percent of capacity. The economy had shrunk by an annual one percent, while the population continued to grow. All sectors collapsed apart from subsistence agriculture, for lack of imported inputs.

Obote’s second administration was dogged by insecurity, although some progress was made at recovery. The economy grew by 5.5% and inflation fell to 20% while the share of agriculture fell from 70.5% of to about 50% of GDP.

The NRM’s triumphant entry into Kampala in January 1986 was therefore tempered by the reality of a basket case economy and enormity of the task of resurrecting it.

In 1986 per capita GDP was less than half what it was fifteen years earlier, the government tax base had collapsed as subsistence agriculture and the informal sector accounted for almost all of economic output.

A country is only as viable as its private sector, because it is he private sector that pays the taxes that sustain governments and finance infrastructure and social services.

In the beginning the NRM deeply opposed donor prescriptions for the economy. It revalued the shilling, allocated commodities administratively, sought to control prices and maintain the parastatal monopolies.

But there was only so much a government with empty coffers could do.

Years after Obote’s nationalization drive and Amin’s expulsion of the Asians no comparable indigenous business class had emerged to fill the void left but these well-meaning but disastrous attempts at economic engineering.

Faced with the urgent need to jump start the economy with little money to sustain its central planning agenda the NRM did an about face invited the Asians back -- a process that begun with the Obote II government, privatized state corporations and liberalized the markets.

This was the much needed shot in the arm the economy needed.

A combination of these policies in addition to liberal dozes of foreign aid have seen the country enjoy its longest stretch of economic growth in the last 50 years.

Revenues are up a thousand fold from 1986, manufacturing and services now dominate economic output and exports have been diversified away from coffee.

Uganda in recent years has been judged the most entrepreneurial country in the world. The nationalization of enterprises, the expulsion of the Asians and hard economic times could take the credit for bring about this situation. The challenge though is, for lack of know how the indigenous Ugandan businessman has failed to graduate from a subsistence businessman. To get to the next level the Ugandan businessman would have to learn how to aggregate his efforts with partners in order to pursue ambitions beyond his own personal upkeep.

The frustration of the colonial settler farmer and the expulsion of the Asians denied Ugandans that skill transfer and the insecurity of the 1970s and 1980s short circuited the learning process further.

As a result of these decisions taken generations ago we find ourselves in a high inflationary situation partly because our agricultural production could not fill a regional gap left by drought hit Kenya last year. While we continue to be donor dependent because the informal sector continues to dominate the economy and hence a narrow tax base.

Going forward – and politics aside, the resolution of our land tenure system and the development of a more credible entrepreneurial class will determine whether we continue on a growth trajectory or not.

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