NO NEED TO REINVENT THE WHEEL

Last week I read two articles about the development process. 

On the one hand was "Devaluing the Bolvarian revolution" an article in The Economist that tried to describe the challenge of getting the Venezuelan economy up and running after years of populist policies that have sunk the economy, never mind that the South American nation is one of the world's largest oil producers.

The second article was about China, "The most disciplined organization in human history". According to the article the Chinese Communist Party is that organization, judged by its role in spearheading the rise of China characterized not only by its huge leap in its macro economic numbers but by the tens of millions of its citizens it has lifted out of poverty in the space of under half a century.

At the heart of China's reemergence as a world power is the principle of "the State as a work of science or Scientific development". That "state’s affairs should not be a matter of opinion, intuition, impulse, emotion, religion, personal preferences or lineage, but based on the scientific approach of “seek truth from facts” in political and economic affairs."

The determination to do this came following the death of Mao Tse Tsung who led the country on a series of disastrous social engineering experiments that they have however exploited to their advantage.

Venezuela under Hugo Chavez however has gone down a dark tunnel not unlike one that Robert Mugabe has taken Zimbabwe. The supporters of both men argue that they were forced to do the things they have -- Gut the productive classes, expand the government to unsustainable levels and indulge in populist but economically unsustainable policies because of external threats.

Anyone who has observed world events would not discount their fears and may be tempted to cut them some slack. But one could also argue that China has developed in the same environment and even under harsher circumstances.

As a communist nation, which not only had to fend off western holier-than-thou democrats but also interference from its once ally the USSR, who wanted to bring the world's most populous nation under its thumb and expand it sphere of influence beyond eastern Europe, the rise of China was never a forgone conclusion.

China comes under a lot of criticism for its human rights record but they have a response to that, arguing that the time will come for that, that it is in fact inevitable, but for the time being what they most need now is discipline.

The current appreciation of human rights in the western democracies came out of a long evolutionary process. We may study about them in the text books but the world's majority have no real appreciation for them. Even in those same western democracies there are still significant pockets of racism, bigotry and xenophobia.

It's all very nice to cut and paste these rights into our constitution and laws but is something else to practice them.

I would be loath to call for a roll back of the few rights we now enjoy, least of all my freedom to express myself, but China provides a compelling argument for a unified authority. As did Europe before democracy came a few hundred years ago in the wake of the industrial revolution.

The development process is a series of trade offs depending on the particular circumstances of a particular country or region. It also a long winding process that never proceeds in a straight line.

The basic principle has to be that whatever is planned or implemented is done for the eventual benefit of the population. The benefits may not be visible in the short term but it is hoped they will be seen in the long term.

But we know that even the best of intentions do not necessarily deliver the desired result. That's life.

China's is set to overtake the US as the globe's largest economy within a decade, but going by its per capita statistics it is still a middle income nation. A lot of work is still to be done. 

You can be sure when they started this journey in 1978 -- when they decided to introduce some elements of the market economy or even in 1949 -- when it was proclaimed the People's Republic, the naysayers outnumbered and outshouted the believers. That's what happens at the beginning of any human endeavor of any significance.

I guess we will find our own way but it will be useful to remember, 

.

Without discipline we would accomplish Nothing.

With Some discipline we can solve only Some problems.

With Total discipline we can solve All problems.

- Peck Scott, The Road Less Traveled.

KICK SENTIMENTALITY OUT THE WINDOW, TO FIGHT POVERTY

In the aftermath of the budget speech many commentators have questioned the wisdom of imposing taxes on agricultural inputs. They complain that these taxes will make it more difficult for rural populations the majority of who derive their sustenance from the land. They argue that government is offering no or little support to agriculture and should not tax the farmers.

They may very well be right.

The taxes, more specifically VAT on everything from hoes to machinery, may increase their costs, may very well make agriculture unviable for many and may even jeopardize food security (though I highly doubt it).

On a broader level there is the question of poverty it's prevalence and our efforts to alleviate and, hopefully eventually eradicate it.

The way we measure poverty -- people who live on less than a dollar a day, suggests that most of the poor are in the rural areas and mostly in the north and the east. By this measure the country has been doing famously in lowering the proportion of the poor among us -- we down to about 20 percent from two decades ago when about half the population lived below the poverty line.

Of course the anecdotal evidence suggests otherwise.

"It's safe to say our measure of poverty is more statistical than anything -- if you put your head In a fridge and your feet in a furnace on average you will be ok; are colored by the local and international politics and really don't get to the bottom of the issue, which is how do we raise incomes across the board and when we do so how can we ensure that the people keep more and more of their expanding incomes, the true measure of poverty eradication...

We are obviously going about it the wrong way. If you wanted to alleviate sadness in your life wouldn't it make sense to aim for more happiness, which is the opposite of sadness, rather than aim for less frowning or pouting?

So the question then becomes how do we increase the wealth of our people? 

Straight off the bat we need to recalibrate our economic classifications, it takes more than earning a dollar a day to vault out of poverty. Also that poverty is not just a rural phenomenon -- some of the worst occurrences of abject poverty can be found barely meters off Kampala road.

Studies have shown that improved education leads to higher incomes. It is also obvious the healthier you are the more you can work and therefore the more you can earn. And of course the better the social -- security and institutions, and physical -- communications and energy, infrastructure the better the general economy can grow and therefore allow more and more people to benefit.

But we also know that often times the 80/20 rule or variations of it will apply in the distribution of income and wealth: twenty percent of the population will earn or control 80 percent of the income or wealth. Utopia is a fantasy.

Since we are now aiming for more wealth rather than less poverty it would be instrumental to study the top 20 percent, in the hope that we can trickle down a bit of their knowhow for the benefit of more people. Also in the process while we might not shatter the 80/20 rule at least we will have grown a bigger pie so that everyone has more.

A look down the ranks of the largest tax payers will show up some differences from our farmers. To begin with they pay more taxes, infinitely so seeing as our farmers pay none at all, and they have not collapsed. How do they do it?

Our biggest companies leverage partnerships with investors, banks and because of their size, even governments. Farmer Mukasa, Okello or Asedri trying to eke the last drop of nutrients from his plot is at a decided disadvantage in trying to go it alone.

But the first companies were not created or sustained out of camaraderie of their founders but out of a need to mitigate against risk. They were compelled to do so.

Our farmers have remained largely subsistence. Why bother getting more organized when you have a tax free status? They need some compulsion to get organized, produce more and keep more -- by the way the tax laws are rather lenient with people amassing assets.

People are quick to point out that western governments are lenient on their farmers in order to keep them in business. That does not mean their lands, inputs and incomes are not taxed.

But they also forget the history of the agricultural revolution. The western farmers with less than ideal climate and soils were forced to be more organized to grow food to not only last through the year from one season but also to feed the thinkers and soldiers. We obviously do not have the advantage of poor weather and marginal soils but nevertheless need an external compulsion to get the falling productivity of our lands up to a place where we can seriously talk about poverty....sorry, wealth creation for all...

Another way to increase national productivity would be to enslave all the marginal workers -- read the rural population, aggregate their lands and set up huge agroprocessing industries where they can work. This might do nothing for improving welfare for the general population but would have the statisticians licking their chops at the ballooning per capita incomes.

Viewed against this, taxation does not look so bad, does it?

EVERYBODY WANTS TO GO TO HEAVEN NO ONE WANTS TO DIE

Investor Jim Rogers made a trip around the world on his motor cycle in 1980.

On his trip through China then, he predicted that the most populous nation would be a major economic power house. He based his prediction on the massive investment the country was making in its roads, railways and ports despite the visible poverty he saw around.

This was barely three years after Chinese leadership chose to introduce some elements of the market economy to help them boost the economy. By 1980 the country was investing 25 percent of its economic output compared to the US’ 16 percent.

Fast forward to the present and the results are there for all to see. Their massive investments in infrastructure and human resource is such that economists are now predicting that China will overtake the US as the largest economy this year and not in 2027 as previously thought.

One can imagine that even then when they set off on their journey they were many competing needs for the money, but the Chinese committed massive amounts to investment, put their heads down and ground it out.

The work is far from over since even now in terms of GDP per capita they are still below $10,000 and are ranked 83^rd in the world. There are still questions about how they mitigate against environmental degradation but it’s safe to say their momentum will carry them along nicely into the future.

Last week’s budget reading showed that the government has stayed the course in its determination to bridge our infrastructure gaps. Between the works and energy ministry they account for three in every ten shillings of the sh15 trillion budget.

Finance minister Maria Kiwanuka said the money would be used to accelerate the construction of ongoing works on 1,700 km of road and embark on 650km of new roads. Monies were also set aside for the railway line, power dams and transmission lines.

Of course it is one thing to plan but another altogether to execute these plans properly.

But all the infrastructure in the world will count for nothing if you don’t have the quality of people to exploit these resources to their and the nation’s benefit.

It was heartening to see that education and health followed behind investments in physical infrastructure with these four categories taking up half the entire budget.

A lot of work has got to be done on raising the level of our education but until that is done I guess we will play the numbers game. So if it takes 1000 students to enrol in P1 to produce a top notch engineer, statistically we will have a better chance of discovering top notch engineers if we push a million kids into school. Not quite but something like that.

The same can be said for health when it comes to things like national vaccination programs but not necessarily for jamming people into our overstrained health facilities.

So the key is, that with all this money being thrown at our most pressing deficiencies, if used properly we should see a qualitative improvement in our lives five, 10- or 15-years down the road.

Which brings us around to the issue of corruption. In the last financial year the finance ministry moved to reduce the number of government accounts and devolved the payroll to the districts as part of attempts to streamline government expenditure – a euphemism for plugging the loopholes the thieves were exploiting.

As a result many ghosts workers have been exhumed (forgive the pun) and frivolous expenditures whittled down.

It’s beginning to happen already but increasingly money is being spent on what it’s supposed to be doing and a certain segment of the population is gnashing their teeth as the easy money has stopped flowing.

They of course are not taking it lying down but are fighting back  with such nastiness and vehemence that you have to wonder how long before our politicians lose their resolve and restore things to business as usual.

On the whole the budget set the right tone – shifting our expenditures away from consumption to investments.

The rehabilitation of our transport and communications networks in the eighties and nineties underpinned the growth of the last 30 years. Building hundreds of kilometres of road, adding hundreds of megawatts to the grid and increasing the efficiencies on our railway line will be at the heart of the next surge in growth. That is if we can execute these programs properly.

In the meantime the huge monies need to pull off these investments means we might be in for a few more years of belt tightening unpalatable as it sounds. But to get a better standard of living for us that is the sacrifice we have to make.

But as they say everyone wants to go to heaven but now wants to die.

THE BUDGET: TAKE CARE OF THE CENTS AND THE SHILLINGS WILL TAKE CARE OF THEMSELVES

This week Finance minister Maria Kiwanuka will be reading the budget to the nation.

It’s been a hard year but we heard during the state of the nation address last week that economic growth would come in marginally lower than it did last year at 5.7%. This year’s growth was driven mainly by mining, cash crops, informal manufacturing and trade.

The budget, an account of the how the government will spend and what plans it has to raise the money to spend, serves as an x-ray of what government priorities are, forget the rhetoric.

Uganda currently collects taxes amounting to about 12% of GDP. A low figure when viewed against the Sub Saharan Africa average of 16% or even against Rwanda which has just managed 15%.

The government has almost exhausted all the taxes it can levy any new announcements will just be variations on the existing regime.

"The challenge of course is to collect all the taxes due to government from all those people or companies liable. A handful of people – mostly employees are shouldering the bulk of the tax burden....

So the trick is to widen the tax base – rope more people into the loop to spread the pain more evenly and of course collect more tax.

This is easier said than done.

Observers estimate that as much as 70% of our economy is in the informal sector, that is a lot of our economic output is generated by unregistered entities or individuals. This would not be a problem were it not for the fact that these informal operations put a ceiling on the potential of these entities and by extension the economy.

It has been argued that the cost of going formal serves as a disincentive to small businessmen, who while they may appreciate the benefits of going formal just can’t be bothered to go through the paperwork of going formal or subject themselves to the discipline to maintain the formality of their business.

Attempts to centralise set up requirements with the Registration Bureau Services is a step in the right direction.

In addition a two-year old initiative to enforce a law which for the purchase of an asset of more than sh50m a clean bill of health should be shown is a welcome innovation.

But when we talk about people meeting their tax obligations, while the informality of our economy is a problem, the amount of tax evasion even by the most respectable firms and individuals is worrying.

They are involved in creative accounting to under declare incomes or employing “higher ups” to prevent URA chasing them down for their just dues.

The latter cases are really cases of indiscipline by the higher ups and should be reported and handled administratively however in the former case we can go a long way to plugging this loophole by inserting in existing laws to two clauses.

The first being that returns should only be filed using accounts audited by credible firms and secondly, a law should be enacted that any accountant found abetting tax evasion should be disciplined to the extent of removing them from accountants roll.

One accountant hazarded that these two initiatives alone may be good for at least another two percentage points on our tax-to-GDP ratio.

In addition this would level the playing field for businesses.

As it is now legitimate businessmen are suffering because less scrupulous individuals are not being taxed properly, using this “free” cash to expand more rapidly and undercut the competition. This kind of underhand practices can have the effect of concentrating sectors in a few hands, reducing competition and its attendant benefits, which affects not only the government in lost taxes, but also employees who would be paid less than their rightful due, suppliers who will be stuck with a few clients and therefore lose their own bargain power and customers who will be stuck with no variety and poor quality goods and services.

And it is already happening.

It’s within the minister’s power on Thursday to suggest such additions to the income tax act.

RAINING ON THE WORLD CUP PARADE

I can’t wait for the World Cup to kick off.

The World Cup is without a doubt the biggest entertainment spectacle on the planet.  FIFA, the sport’s governing body estimates that 3.2 billion people watched the last edition in 2010. And of course with all these eyeballs comes money.

In 2010 South Africa spent about $4b – sh10 trillion or about the whole Ugandan annual budget, to prepare for the soccer bonanza.

Brazil it is estimated has already spent about $11b in preparing for the hosting of only their second world cup in 60 years.

Brazil have projected to earn more -- $11b with some $2.6b coming from the expected 600,000 tourists and $7.9b coming from the three million Brazilians who will be at the games.

And these mind bending figures are at the heart of the incessant protests that have plagued the South American nation in recent days.

"It is the classic case of the politicians and statistics saying one thing about a country while the truth on the ground reflects a bleaker reality...

The protestors are outraged that their country can commit such vast sums to the World Cup while poverty and inequality are rampant in the general Brazilian society.

While Brazil may be considered a middle income country with its $10,773 GDP per capita, statistics also show that the country has some of the highest economic unequal societies in the world.

Gini coefficient, which measures economic equality, for Brazil is 0.52 – the nearer this figure is to 1 the more inequality exists in a society. The same figure for Uganda is 0.44. 

Brazil is a “democracy” so one wonders how come Brasilia can be so oblivious to the outcry of the people opting for an event, which is more an aggrandisement project for the powers that be with little benefit to the general society relative to the amounts spent to host this circus?

In fact there is no evidence that any World Cup has met the vaunted expectations that justified its hosting. In South Africa it is estimated the country could have netted $500 million, which is probably overstated as they are now saddled with unviable sporting arenas around the country that are costing local councils millions to manage with no hope of return.

But as always not everyone loses out.

After the last World Cup FIFA banked a $631m surplus to their reserves which doubled to $1.2b. You can expect there are contracting firms still living off the fat of the lucrative infrastructure and business deals. It’s the same old story of a small minority deriving incalculable benefit from these kind of events and living it to the majority – the taxpayers, to foot the bill...

Beyond the thrill of having the superstars of the world game planting their feet on their home soil it is hard to see how hosting a World Cup would sell in a national referendum.

Obviously such public spectacle also play a role in diverting public attention from the real issues while lining the pockets of the connected individuals and companies.

And they have been very successful. Chances are when the world Cup kicks off the protestors will leave the picket lines and tune in to the action.

There are precedents for these kind of tactics by the powers of the day.

"In ancient Rome as the empire’s begun to totter on its foundations ever spectacular events were organised for the general public to enjoy. The Coliseum completed in the first century after Christ was born could accommodate 50,000 people --- Namboole can barely manage 40,000, to view orgies of increasingly gratuitous bloodletting and mythical fantasy to divert the people’s minds from their diminishing welfare, while the powerful elite continued to enjoy lives of pomp and plenty....

The World Cup incidentally becomes more and more spectacular for the viewing public and more profitable for the people who hold the purse strings.

Chances are this analysis will not dampen the fervour for the event. We will suspend disbelief (me too) and enjoy the skill and performance of current heros and maybe, just maybe, get back to the issues a month from now.  Sad but true!