Thursday, October 13, 2016

WE ARE OUT OF TIME TO BE MIDDLE INCOME COUNTRY BY 2020

When Lee Kuan Yew took over the reins of power in Singapore in 1965 he and his cabinet, many of whom were English trained lawyers, set as themselves the target of raising the small island nation’s per capita to that of the UK within a generation.

At the time Singapore’s per capita GDP was $511 while the UK’s was just under four times that at $1, 850.

With the goal in mind they begun to work backwards investing in human capital, raising national savings, developing their potential as a logistics hub, developed their financial services, dabbling initially in manufacturing before focusing on physical and biological hitech sciences.

It wasn’t a smooth ride with the country had to chart a developmental path while faced with risks to national security, walk the tight rope of Cold War geopolitics and begin from a standing start with a small, poor population riven by ethnic tension, on an island which had no resources except for its strategic location on the sea route to the far east.

A half century down the road and Singapore now has a per capita GDP of $56,319 according to the International Monetary Fund (IMF) while the UK’s figure stands at about $42,000.

Interestingly if one was to do a straight mathematical calculation the growth in Singapore’s per capita GDP meant the country’s economy was growing at 9.65 percent

"Our target of attaining middle income status is not very different from what Singapore set out to do those many years ago except that we have set ourselves a steep growth curve....

What does it mean to attain middle income status as a country?

Middle income countries are nations that have a per capita GDP of between $1,036 and $12,615, a categorisation used by donors in deciding how to engage with countries.

Simply put it means that on average on attainment of this status a Ugandan – including children and prisoners, will have an income of at least a thousand dollars a year or about sh275,000 a month, when the nation’s total output in a given year is divided by 36 million-or-so Ugandans.

For some readers of this newspaper who earn multiples of this monthly it is a ridiculous target to aim for but is a reflection of how unevenly the benefits of development are spread out.

According to the Uganda National Household Survey 2012/13 just under two in every ten Ugandans or 16.9 percent earn more than a million shillings a year. While 17 percent of urban dwellers earn above a million shillings, only five percent of rural people earn that money in a year.

No figures were immediately available but one can expect that the disparities are even more dire for people who earn above the magic sh3.3 million a year.

On the surface of it, it is clear that one way to more evenly spread the love and set ourselves on a sustainable path to middle income status is to raise rural incomes.

The National Planning Authority (NPA) agree.

“The NDPII (National Development Plan II) identifies five lead sectors that if well focused, can propel this country to middle income status. These are: Agriculture; Tourism, minerals, oil and gas; Human Capital development and infrastructure development,” the NPA said recently in their recent “Roadmap to attaining middle income status for Uganda”

“At a macro level for middle income status to be achieved we must ensure the following; GDP must grow and the population growth must be contained; Macroeconomic stability must be ensured (including foreign exchange stabilization) For foreign exchange to be stabilized, exports must increase progressively, capital outflows should be reduced, and capital inflows increased; Productivity across sectors must be increased; Investment in public infrastructure must be frontloaded - Financial deepening / savings must be increased - Capital accumulation must be front loaded - Low interest rates must be maintained / cheaper capital,” The NPA added.

Given all this can we make middle income status by 2020?

"From a purely arithmetical standpoint to attain middle income by December 31st, 2020 our per capita income – now at about $650, will have to grow by 12 percent a year. When you factor in our population growth of about three percent the economy will have to grow by at least 15 percent a year for the next four years starting in 2017 essentially that the economy has to almost double from its current $26b to $47b...

According to the World Bank at the peak of the current economic revival I the 1990s and 2000s economic growth averaged seven percent, putting Uganda among the fastest growing economies in the world.

But maybe it isn’t impossible. The Ugandan economy has almost quadrupled in size to the current $26.37b according to the World Bank from $6.179b in 2002. This means that the compounded average growth during this period just under 12 percent.

So what do we needed to jump start the economy which fell short of expectations last year growing by 4.6 percent compared to the earlier projected 5.5 percent.

So where will the quick fixes come from?

“Agriculture. Because of how many people it employs when agricultural output grows by even four percent it has a ripple effect through the economy. People are already producing and the market is already there so you can see almost immediate gains if we targeted agriculture.  It feeds into our exchange rate and directly into the incomes of the people,” said economist Dr Fred Muhumuza.

The interventions would take the form of provision of improved planting and breeding materials and extension services in the immediate term and improved financing options and policy reforms in the long term.

Muhumuza also suggested that reforms in the way government works would be necessary.

“These stalled government projects need to get off the ground. Why do we have money lying around unused? The projects will not only release cash into the general economy but their implementation will have a multiplier effect through the economy.”

Muhumuza, a senior manager accounting firm KPMG is sceptical that the huge infrastructure projects will provide the growth required to take us over the finish line in four years.

“The benefits of infrastructure will come over time. But being funded by foreign financing its becoming troublesome, “a veiled reference to the World Bank’s recent announcement it was suspending aid to Uganda, for our inability to optimally utilise existing resources.

"Muhumuza wondered too why when interest rates were negative in more developed economies, why we are not seeing a surge of funding to our shores, which would support these mega projects that are sorely needed to bridge our huge infrastructure deficits...

Another observer of the economy speaking on condition of anonymity was less forgiving.
“Middle income status will come soon enough out of sheer momentum. But we can do better if we only got our strategy right, put the right people in place and gave them an enabling environment. Talk is cheap let us just do the bare minimum we are supposed to do – provide quality education and health services, enable improvements in transport and other infrastructure and cut down on corruption and it’s a mathematical certainty that middle income will come…. But not in the next four years.”


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