THE ECONOMICS OF REVOLUTION

If you wake up and find your neighbour is an overnight success, know he has not been asleep.

The events in North Africa have been brewing for at least a generation. We are witnessing the closing act, or rather, the climax before the intermission, because you can guarantee that these countries, especially Libya, will not return to business-as-usual anytime soon.

After all democracy only comes long after the revolution has eaten its children.

Interestingly the three states set on fire in the last two moths are those with the highest Human Development Indicators (HDI) in the region.

The HDI is a statistical measure of the quality of life of a population using access to health, education and other social services as indicators.

Relative to other countries on the continent the populations of these countries were well off.

The wealth disparities – another source of unrest, in these countries are less extreme than elsewhere on the continent.

But you know what they say? If you had your head in the freezer and feet in the furnace on average you would be okay.

The suggestion has always been that poverty and the large wealth inequalities are the breeding grounds for discontent and eventual upheaval. The poor majority seeing no future ahead of them are easily incited to violence and mayhem.

Historians further suggest that to forestall revolution political elites need to create a middle class – owners or property, jobs and professions, who then stabilize society by urging less violent means of conflict resolution and hence democracy.

But the political elite have a dilemma that if they grow a middle class they will start agitating for their rights and jostling for political power. Basically its too much work engaging a middle class, in the short term its much easier to run rough shod over the people.

The ruling classes in the North Africa have gone a step further, thanks to massive oil revenues and provided infrastructure and social services, keeping people from agitating for their rights.

That worked well for them during the cold war. But fissures started showing with the falling of the Berlin wall and the rapid spread of telecommunication technologies starting in the 90s.

To understand how improved communications is shaping the world one needs to understand truth.

We determine what is truth or not, through six basic filters.

Without going into detail, without information our truth is coloured by what others do (consensus), what has been happening (consistency), what a respected institution dictates (authority) and revelations passed down by authorities. However with more information scientific knowledge, truth tested to experiment, dominates and may endure.

So suddenly after years of authoritarian rule through secular state’s like Ben Ali’s Tunisia, Muammar Gadaffi’s Libya and Hosni Mubarak’s Egypt, their people who were blind but can now see, realize they deserve better.

And we are not just talking about their rights, but their standard of living as well. For years they have been fed on the propaganda that they are better off than other people on the continent or even around the world. Now they know better and have worked out that the only way to get what belongs to them is to oust their atrophied leadership.

Also through sources previously unknown to them they learn that their leaders are not feeling their pain. They always knew their leaders were rich but have been shocked to discover that their leaders have been stashing away billions of dollars in Swiss accounts, gambling in Monte Carlo and have yachts moored on the French Riviera.

And suddenly too, they can connect with other dissenting voices not only in their neighbourhood or region but countrywide and worldwide as well.

And suddenly again, their first class health care, education, free state provided flat and job for life mean nothing.

The octogenarian leaders of the third world would be well served to read up on Maslow’s hierarchy of needs.

Often depicted as a pyramid, at the bottom of which are the physiological needs of food, water, sex etc, on the next level the safety needs – shelter, clothing, job etc. After these levels have been attained things get murky because physical things can not satisfy the need for love, self esteem and self actualization. When people reach this stage they start agitating for freedom.

So in a sense the leaders of North Africa have become victims of their own success. They could not see beyond providing for the physical needs of their citizens – the economics, and their myopia has caught up with them.

THE POLLS ARE OVER, NOW THE HANGOVER

I have no clue what happened, what the outcome was of the 2011 presidential and parliamentary election.

That probably sounds funny from where you are standing but its true. I wrote this long before a single vote was cast (I hope) and I am therefore writing it blind so to speak.

Prophesies they say, tell more about the prophet than the events being foretold.
I will therefore not predict who won.

But whoever he or she is there will be no time to rest on their laurels.

I am a Ugandan and we Ugandans like to talk politics, but I shall desist. Our politics anyway is too murky a subject to be unraveled in 700 or even 700,000 words.
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Whoever takes over is going to have to mop up all this money that has been sloshing around during the last few months of electioneering.

"Consumption went up a few scores of billion shillings in the last few months with the biggest beneficiaries I guess, being fuel, telecom and beverage companies...

Consumption drives production but we all know this was a bleep on our consumption graph, unlikely to happen again until 2016. So there is a very real danger that inflation – price increase prompted by too much money chasing too few goods, will rear its ugly head shortly.

In January annual inflation rose to 5% from 3.1% the previous month.

The government whose target is an annualised inflation rate of 5% can be expected through the Bank of Uganda to mop up these excess monies.

So in a way one does not want to be in the next government’s shoes. They will have to tighten government expenditure while finding a way to pay for all the campaign pledges they made. A poisoned chalice if ever I saw one.

Former Minister Richard Kaijuka once lamented that if it were not for politics, turning around the Ugandan economy – at that time just under $10b worth, would not be a big deal.

If this was a purely economic question the central bank and treasury have proven time and time again that they know what to do. As recently as August 2008 inflation touched 16%.

It is not easy for economic growth to happen when government is putting the breaks on spending.

Without government spending on infrastructure, business will be hard to do in this country. Without spending on health and education the productivity of our workforce will be further depressed. Without spending on the judiciary the case backlog will persist further dampening business efficiency.

And growth is critical if we are to continue pulling more and more people out of poverty....

In controlling inflation we may see a rising in lending rates in responses to actions taken by the Bank of Uganda.

If the central bank issues more government securities we can expect yields to rise. It is a against these yields that banks peg their lending rates, often in addition to their administrative costs, risk element and margin.

So we might have to sweat through higher lending rates for the next 12 months at least. On the flip side people investing in treasury bills and bonds maybe laughing all the way from the bank.

High lending rates do not augur well for business and therefore a powerful dent in economic growth.

The new government will have some hard and unpopular decisions to make.

As if that is not enough, last week the International Monetary Fund (IMF) expressed displeasure at our handling of the economy.

Uganda which has graduated from the poorest countries but still needs the nod from the IMF to access funds from other bilateral lenders, apparently reneged on an agreed economic program, most probably our spending got out of hand in recent months.

While have reduced our donor dependence significantly over the last two decades they are still important players in our economy.

"So remedying our errant spending ways, while massaging bruised egos in Washington will be at the top of the to-do list of the Finance minister....

As Nelson Mandela said, after climbing a great hill, one only finds that there are many more hills to climb.

It’s a thankless job but someone has got to do it.

NO INFRASTRUCTURE, NO EA INTEGRATION

Long, Long time ago former president of the then Zaire Mobutu Seseko made a state visit neighbouring Central African Republic. Received ta the airport by his counterpart Jean Bedel Bokasa they drove along multi-laned highway to the capital and on to Bokasa’s palace.

At the palace the Mobutu took Bokasa aside admonished him, “My friend,” he must have said. “What is wrong with you? How can you have such well paved roads leading to the capital? Do you want to be overthrown?”

It may sound funny now but if you visit the DRC today the most efficient mode of transport is by air, never mind that most of the air travel is done by decommissioned Soviet era planes whose safety would be hard to vouch for.

I recalled this anecdote last week on a road trip to Dar es Salaam from Kampala.

The 1800 km trip sponsored by the Tanzania Ports Authority, was meant to showcase the central corridor route – Mutukula to Dar es Salaam and promote it to the Ugandan business community as an alternative rout to the Kampala-Mombasa route.

Of all the four million tons of cargo that comes in or goes out of Uganda only one percent of it is channeled through Dar Es Salaam. This is down almost five times form the 2004 high of 132,137 tons.

Since then the sinking of the MV Kabalega in 2005 Uganda cargo on the route has fallen sharply.

Apart for a 100 km stretch before you get to the intersection to Rwanda at Lusahunga, the road is well laid. The poor quality of the road was a major impediment previously.

That Uganda external trade is totally exposed to the Mombasa route is the height of imprudence and that we have continued to let the situation drag on makes one wonder.

The larger strategic issue aside there are several bottlenecks both governments – Kampala and Dodoma, need to address to see more freight plying the central corridor.

For starters the distance to Dar es Salaam is about 600 km longer than that to Mombasa. Businessmen on the trip suggested that concessions have to be made to mitigate against this greater distance. For instance Tanzania might want to negotiate with Uganda to freight charges tax free on cargo coming through Dar es Salaam.

While acknowledging that the road was much improved the businessmen suggested that the vast distances between major towns need to be dotted with service points where passengers can sleep over or cars maintained.

In addition to improving the road the Tanzanians have invested in speeding up turn around at the Dar es Salaam port and are in talks with Kampala on multi-billion dollar project to develop Tanga, Port Bell and Kampala Port, to resuscitate the railway line and reinstate the ferry system on Lake Victoria.

Interestingly given our near death experience after the Kenyan post election violence in 2008 there seems to be little urgency in resolving this issue once and for all to the satisfaction of the business community.

Businessmen will not adopt the rout e because of some unquantifiable love for Tanzania. They will use the route because it makes business sense.

Making the route profitable is not rocket science but will need bureaucrats on both sides of the border to think like business or at the bare minimum be sensitive to their concerns.

We can sign all the protocols in the world but as long as our regional infrastructure remains wanting East African integration will remain a pipe dream toasted to in Arusha.

One of the reasons the East African community collapsed the first time was for lack of widespread interaction between the three country’s populations, beyond the handful of technocrats posted at the various capitals. This allowed the leaders of the time to play around with a public good like with little resistance from the people.

This is understandable since the colonial infrastructure was designed to extract raw materials and not improve communication in the region.

In a related incident Kenyan investment firm Centum cross listed their shares on the Uganda Securities Exchange. The 45 year old investment firm has $140 m under management, invested in companies and real estate around the region.

The company with pan-African ambitions has proved itself at raising and deploying capital to the benefit of its shareholders.

East Africa’s infrastructure needs are urgent and badly in need of funding. However our governments are only just waking up to the realisation that government need not go it alone.

The old model of government determining to build one project or the other, sourcing donor funding and building has left the region littered with white elephants that serve little or no productive use. The private sector, the major employers of the infrastructure need to be more involved in deciding what we build and what we do not build.

Groups like Centum have shown that we have more than adequate resources among us to look after ourselves.

Donor funding has its limits, as we learnt with Bujagali, and local capital which has a better understanding of local conditions, less risk averse and patriotic is definitely where we need to be looking.

OPPORTUNITIES ABOUND IN LAWLESS SOUTHERN SUDAN

MOSES rues the day he decided to do business in southern Sudan. He heard stories about how there was a lot of money to be made in Southern Sudan. So he and some friends pooled their resources and put together a four-truck convoy of general merchandise and food to transport to Uganda’s northern neighbour. 

A planned week-long trip stretched out into several weeks as impassable roads, numerous road blocks, armed hijackers, disease, frequent vehicle breakdowns and a hostile business environment conspired to slow him down and vanish his profit and capital. “It was hell. How do people make money in that place. I would rather look for smaller and surer returns than gamble with my money and life,” he said days after returning, a lot darker and several kilos lighter. 

 Uganda’s is Southern Sudan’s biggest trading partner currently. According to the most recent figures available $260m (about sh598b) worth of goods and services was traded between the two nations in 2009. Observers say this figure has risen since, estimating that up to a quarter of all Ugandan imports are meant for the southern Sudan market. Uganda import bill in 2010 was $3.8b. 

 “There are many opportunities in Southern Sudan,” said Kampala City Traders Association (KACITA) spokesman Issa Sekito. “Great demand for housing and construction materials and services, foodstuffs, household commodities, cars and other goods and services … they produce nearly nothing everything has to be imported so you can imagine the opportunity.” The area known as Southern Sudan is 619,745 square kilometres or almost thrice the size of the Uganda. The population stands at between 7.5 million and 13 million, so it has vast unihabitted spaces. Ravaged by a civil war between the north and the South for more than 20 years this already marginalised behemoth has never really got on its feet. As an indicator there are only 60km of tarmarcked road in all the region, power is provided by generator as there is no national grid and water is scarce in many areas. ...

 Apart from part of the DR Congo, Southern Sudan is largely untouched by modernity which is a challenge but also a source of immense opportunity. The region contains many mineral resources such as petroleum, iron ore, copper, chromium ore, zinc, tungsten, mica, silver and gold. There are huge international interests with their eye on Southern Sudan’s vast natural resource potential but everyone agrees that the biggest challenge is to overcome the general state of lawlessness in the area. 

“These are people who are just out of a war, there was not much in the area before the war and what little there was in the way of systems and institutions have broken down,” KACITA spokeman Sekitto said. At the top of many traders’ challenges in dealing with Southern Sudan is the real risk of not being paid for goods and services delivered and the lack of formal institutions to resolve such disputes. “I ask for 90% of payment up front if not I lose interest in the whole venture, if they do not pay you where do you find them? And there is a real danger that if you press too much for payment you can be literally lose your life,” another transporter said. 

According to Sekitto at least 20 Ugandans have lost their lives following such disputes and Kampala seems indifferent to the plight of its businessmen. “The attitude seems to be that political interests supercede commercial interests… we have a petition delivered to parliament at the beginning last year but it has not been tabled in the house,” Sekitto said. 

But the trade ministry disagrees.“We have all those complaints and we have a memorandum of understanding to set up a arbitration committee to look into these claims,” said Silver Ojakol, commissioner external trade in the ministry. He explained that all claimants have been divided into four groups according to whether they have claims with the government of South Sudan (GOSS), local authorities, private businessmen or robbed or defrauded. “The naming of the arbitration committee – which would handle claims between private businessmen has just been delayed by the recent referendum, but our consulate general in Juba is following up on all claims against GOSS and the local authorities,” he said. 

The arbitration committee was agreed on in February last year but has not been constituted todate. As more traders have made the foray into southern Sudan, the margins have thinned considerably. “But they are still by far better than anything our businessmen are used to, which explains why they keep going back … the returns are worth the risk,” businessman Joseph Okiror said.

TWO LEADERS, ONE MESSAGE

This week two leaders made speeches: US President Barack Obama’s State of the Union Address to congress and the world and hours later President Yoweri Museveni’s speech in Masaka at the 25th anniversary celebrations of the NRM’s ascendance to power.

In the spirit of the campaign season Museveni needed to put statistical evidence to the improvements the economy has witnessed during his tenure.

In the US Obama did more forward looking, rallying an American people, beaten down by a stuttering economy, urging a return to basics in order that America can rise and shine again, while reminding them that they should brace themselves for sacrifice before things get better.

Unsurprisingly the delivery was different, befitting the timing and the respective levels of development of the two countries, but both speeches had the economy – more specifically job creation, as their central themes.

Uganda is not perfect by any measure but I am amazed when I look back 10 - , 15- or 20-years to where we were as an economy compared to where we are now. The quadrupling of the size of the economy and corresponding growth in exports, tax revenues, investment since 1986 is not something to be snorted at.

Even more amazing to me is the vast potential going forward, we have achieved this with low road and rail coverage, inadequate power generation, expensive credit and endemic corruption. It boggles the mind to think if these things were put in place or righted what would happen over the next 25 years.

However with growth has come rising inequality, an inevitable byproduct of a free market economy. When economies are liberalized the best placed to take advantage of the new changes are the existing entrepreneurs, the educated and the politicians.

Government needs to commit more seriously to the narrowing of this gap by providing quality education and health services and other public goods that will give every Ugandan a better than fair chance to uplift their station in life.

“Whether it’s developed consciously or unconsciously, this change in perspective about the value of investment in education is the real take off point for developing societies,” Thomas Donlan wrote in the book “A World of Wealth: How Capitalism Turns Profit Into Progress”

Which bring me nicely t o Obama’s speech.

America has been losing jobs at a fast enough rate to lower cost producers – even before the financial crisis, that the “hollowing out of American industry” is not an abstract phenomenon anymore.

Obama’s suggestion to turning this trend a round? “We need to out-innovate, out-educate and out-build the rest of the world. We have to make America the best place in the world to do business. … That is how our people will prosper. That’s how we will win the future”

America is not going back to manufacturing but is looking forward to the information age to reboot its economy. Through innovation, education and improved infrastructure Obama is seeking to boost the productivity of the individual American.

Last year when the stats came out that the Ugandan worker is the least productive in the region, we took it as an affront to hardworking ways. We shouldn’t have.

The low productivity of the Ugandan worker is more a function of our undercapitalization than anything else.

Take for instance that while the industry and services sectors are well entrenched in the ICT age, agriculture has remained frozen in the pre-industrial age. Better technology means the office worker can produce more than the hoe-wielding farmer. It’s no surprise then that as a share off GDP agriculture has slipped back to under 20% from more than half in 1986.

So Obama’s message can be Uganda’s message for the next 25 years.

We need to commit more resources to education, shoring up the syllabus and standardizing our schools. Fund universal health care while leading the way in the medical research. Boost our research and development capacity into crop and animal husbandry, agro-processing, marketing and distribution.

If Obama and his countrymen are on the moon – literally and figuratively, we are still grounded solidly in the dust, which is a sad testament to 50 years of independence but looked another way, means our possibilities are literally limitless.

LESSONS FROM TUNISIA

We have looked on as events in Tunisia have progressed rapidly from what seemed like isolated demonstrations, building up into nationwide social unrest that forced now ex-president Zine al-Abidine Ben Ali to flee his nation last weekend.

The small North African country of 10 million, wedged between volatile Algeria and back-from-the–cold Libya, has gone largely unnoticed known more for its soccer prowess than anything else. Its impressive social indicators, reputation as a premium tourist and investment destination did little to prepare the outside world for the implosion of the last few weeks.

Even insiders while acknowledging a quiet unease and a simmering resentment at growing corruption and crony capitalism, remained content in the belief that the population’s desire for continued stability would mitigate against any widespread unrest.

Obviously they had badly underestimated the local discontent at the status quo.

The straw that broke the people’s back was the self immolation of a high school dropout, who was stopped by authorities from selling vegetables in a local market because he had no license. An event that probably happens everyday in markets around Tunisia – the expulsion not the subsequent burning.

He was called Mohammed Bouazizi, and he did not set out to start a revolution, but his protest against a system that had become desensitised to the plight of the everyday man while its leaders flaunted their ill gotten wealth, resonated with disaffected masses.

With the benefit of hindsight the events in Tunisia have followed an all too familiar pattern: Government delivers goods and services, people’s welfare improves, government rests on its laurels, people want more, government uses security services to keep them quiet, people’s resentment grows and overflows at a seemingly minor irritation.

If companies exist to make a profit then a government exists to uplift the welfare of its people. But no sooner have the needs of a people been met than the people want more and more. Governments often become victims of their own success.

The only way governments can stay ahead of the game is by not losing touch with the people, which is where democracy comes in.

The example of Singapore is instructive. In his seminal book “From the Third world to First” former prime minister Lee Kuan Yew describes how his country has faced up to this challenge.

By first of all firing up the economy and then ensuring almost universal home ownership, quality and affordable health care and education services and social security Lee Kuan Yew’s party has held sway over Singapore’s politics since independence from Malaysia in 1965.

It should be noted though that by liberal democratic standards Singapore borders on an authoritarian state.

Government taxing the productive sectors to provide public goods, which in turn facilitate the unproductive parts of the economy to become productive is a recipe that should work, has worked and can work.

In pre-independence times, regardless of what the colonialists’ motives were, basic social services and infrastructure were set up that saw a generation lift themselves out of poverty and take over the leadership of this country.

It is doubtful whether that progression will be replicated looking at current circumstances. I would love to be proved wrong.

Governments manage the hopes of people through the economy. If the economy is run well that is, provides opportunities for people to improve their lives, then there is hope and often times that’s all we need.

But when the economy is mismanaged and a critical mass of people see no light at the end of the tunnel, while at the same time a connected clique is benefiting disproportionately, then you have a time bomb on your hands.

And today with developments in technology not only can people communicate much better, share there experiences and discover the commonality of their plight but mobilization of discontent is that much easier.

The truth be told, ordinary citizens don’t really care what government is doing as long as things are ok it’s only when deficiencies in service delivery appear that governments come under attack.

One more thing about Bouazizi. When his vegetable cart was confiscated, the policewoman who oversaw the incident not only refused t the $10 fine he offered, but also slapped and spat at him. Which goes to show when the revolution comes the trigger will not be where we are looking for it and the smallest government agent could be the one who pulls it.

THE CHALLENGE OF HOUSING UGANDA

Last week the high court threw out a petition by Naguru housing estate tenants to block their eviction by government.

The government has offered the area to developers planning a satellite city on the more than 150 acres of prime land. It is claimed that there are currently 100,000 residents of the area.

Related to this issue is the often bundied around number that there is at least a 50,000 house deficit in Kampala alone – to put this in perspective this is the equivalent of about 60 housing estates the size of Bugolobi flats.

It is no secret how we fell behind in keeping up with the country’s accommodation needs. Housing is a long term investment that can not be encouraged by the social and political unrest of the 70s and 80s.

With such pent up demand it would be interesting to find out why the private sector has not jumped in more aggressively to bridge the deficit.

National Housing Construction Corporation (NHCC) has only recently got some private sector interest on board, but shackled by the structural deficiencies of the environment are trudging along as best they can.

"The challenge for many home builders and real estate developers is one that of access to affordable finance. Mortgages rates run in double digits ensuring that, assuming a generous 15 percent interest over 15 years you will end up paying more than one-and-a-half times in interest than the original principal....

The banks in their defence point out that with official interest rates at just under ten percent it’s unrealistic for them to charge any less, seeing as they load their administrative costs, risk and margins above this benchmark rate.

In addition the banks are suffering a shortage of long term funds and by the law of supply and demand mean these funds will come with a built in premium.

Aside from those among us who can out of pocket put down billions of shillings in cash to develop property, many developers have found a way around high lending rates, borrowing in hard currency, which allows interest rates of as little as 5 percent.

The challenge of course, is the exchange risk – the chance that the shilling can lose value against the dollar say, forcing up your finance costs in shilling terms, they mitigate against this charging tenants in dollars.

A temporary measure that has persisted longer than it should.

The day a big time developer finds a way to hedge against exchange risk and charge in shillings, then the market will be irreversibly changed. Who thought for instance 14 years ago that we would be paying for air time in shillings?

The issues dogging real estate development therefore are mainly structural and can be addressed by our planners.

To begin with, credit where it is due. The decision in the 80s not to impose rent controls must be lauded. Were rent controls imposed therefore discouraging new investment in the sector, our housing situation would be far worse than it is right now...

Seeing how NHCC’s most recent projects in Kiwatule and Namugoona were snapped up, it is clear that there is no lack of effective demand for new developments. The challenge then for government is to incentivise developers.

One way is to underwrite the laying out of infrastructure – roads and utilities, in big housing estates. This will not only lower the cost of development but also lower the cost of the individual units.

In addition we need to get pension sector reform out of the way. By allowing other players beyond NSSF to collect workers savings this will boost the pool of long term savings in the financial sector for onlending to developers and for mortgages.

Running concurrently government needs to stream line the land tenure system and its administration, as well as create greater efficiency in our court systems to tackle issues of foreclosures and land generally.

I like Equity Bank’s attitude. The management starts from the principle that everybody has a right to financial services and then work backwards from that premise to tailor products for anybody and everybody. Their success in Kenya – where they control more than half the bank accounts, speaks to the success of this mindset.

Let us commit to the premise that every Ugandan has a right to decent accommodation and work backwards to effect this.

Construction is already one of the main drivers of the economy because of its ripple effect through the economy in job creation, as market for local produced materials and on a more intangible level, improved housing improves the emotional wellbeing of populations reducing the risk of instability.