ANOTHER THEORY OF DEVELOPMENT?

In 1986 when president Yoweri Museveni came to power he lamented how backward the country was. One of his favourite illustrations of why we remain backward was that more than two decades after independence we did not even manufacture safety pins.

Well 26 years down the road and we still do not manufacture safety pins.

Last month the key note speaker at the 6^th Competitiveness Forum was economist Professor Ricardo Hausmann,

Hausmann’s work on relatedness of products traded in the global economy, the product space, and its predictive value in determining the economic growth prospects of countries is fast gaining traction.

One of the outcomes of this work is the creation of the Economic Complexity Index, which differentiates economies by the complexity of the products they make. The more complex the products and economy makes e.g. jet planes the more developed it is.

In explaining why the US for example, has experienced an explosion in wealth in the last two centuries, unparalled in economic history, Hausmann says that it is down to the country’s ability to produce more and more products.

So the trick seems to be, to produce more and more products and that are also increasing in sophistication. You expand your product range by producing related products and then increase the sophistication of the products and processes.

So for instance since we do fish not only can we go up the value chain in fish processing but we can also branch out into crocodile farming and its related industry maybe, with much greater success than we would if we attempted manufacturing speed boats?

The greater the sophistication of an economy or product the more knowledge is embedded in it – a calculator has much more knowledge embedded in it than a pencil and needs greater organizational sophistication to produce.

For purposes of illustration Hausmann uses the term personbyte to refer to the knowledge in one person.

“To create products with more than one personbyte, you need to aggregate personbytes. This is done by creating networks of people we call firms and networks of firms we call the value chain,” Hausmann said.

Government interventions have been many and registered varying success.

It seems though that the more sustainable interventions by governments would be to enable companies to go about the business of making these products.

Interventions such as charting credible national strategies, efficient provision of public goods – law & order, social services and infrastructure are more effective than government trying to startup companies and create products.

This is because the private sector driven by the profit motive is best suited to leverage the process of experimentation and inevitable failure that comes with identifying products and markets. Governments on the other hand are often driven by other motives than operational effectiveness and market efficiency.

Which brings us full circle to why Uganda is not yet manufacturing safety pins 26 years after Museveni identified this a singular failure of our economy.

One, Uganda probably does not need to produce safety pins – who uses them anyway? Two, there are no related industries from which we can launch our safety pin factory and therefore we are not the best suited to produce suited to produce safety pins – one can probably get them cheaper from China anyway.

But it was not our inability to manufacture safety pins that was at issue, but that the economy was not diversified enough.

And Hausmann’s work suggests start with where you are but warns against getting fixated with agriculture.

He says developing agriculture and its related industries is not sufficient to ensure sustained development but that in addition we need to be making other things as well. Agriculture can as well serve as a launch pad.

He gave the interesting example of the Finland whose major natural resource is its forests, so the Finns developed wood-related industries.  But they also developed industries that specialised in making the cutting tools for felling trees. But since cutting is cutting they extended this technology to cutting tools for anything else. And then they automated these tools. And they made them more precise using high technology. To cut—pun intended, a long story short the unintended consequence of the development of the lumbering industry was the creation of mobile telephone technology that led to  Nokia.