STIGLITZ, CLINTON AND APPROPRIATE DEVELOPMENT

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Africa is the contemporary economist’s delight.

Western observers are still studying their own societies to determine how development came about and why economies developed the way they did in one place and not in the other. Africa, much of which is still in the pre-agrarian revolution stage is therefore a useful place not only to experiment but also try out one model or the other of development.

Last week Nobel prize winning economist Joseph Stiglitz was in town to talk about market failures in respect of the current global financial crisis. We also had former US President Bill Clinton in town, on a trip which took him through South Africa and Rwanda.

In his talk Stiglitz warned against unregulated markets. Using events that led up to the global financial crisis, the professor said by making the mistake of allowing the financial markets to regulate themselves the balance between greed and social benefits was lost in favour of the former with society paying the price in lost jobs, watering away of social safety nets and general uncertainty.

Going also by the liberalization of financial markets in the developing world he said the left to their own devices banks would finance consumption and real estate speculation of more long term development projects, like agriculture, which create jobs and have wider reaching societal benefits.

On Thursday former Clinton was in Rwanda to launch the Mt Meru SOYCO – a partnership between Tanzanian based Mt Meru Millers, Rwanda and the Bill Clinton Foundation, a project that will produce and process up to 30,000 tons of seed oil for local consumption and export, provide ready market for 30,000 local farmers and provide employment to 1,400 on the nuclear farm and factory.

Mt Meru Millers already have operations in Lira where in the last four years they have helped increased soya bean production tenfold to 30,000 tons a year currently.

During a trip to Rwanda earlier this year i saw the initial stages of their poverty eradication plan in action. The plan involves helping small farmers pool their land and labour to produce large scale for the market. If executed to even just half of expectations could easily see Rwanda becoming the regional bread basket in under a decade.

The government’s role in the plan is to provide the strategic inputs like infrastructure and legal framework. In the case of Mt Meru’s project the government has provided 30,000 hectares, ferterliser, subsidized seeds, farmer training, roads and made electricity available to the project and the required fiscal incentives.

The initial government input may seem relatively large but viewed over years of the project’s life the benefits in terms of increased production and improvements in the welfare of the participating communities, more than pays for itself.

The reason Uganda and most of Africa is in the pre-agricultural revolution stage is because of its failure to bring improved farming methods enhanced by entrepreneurship to bear on the land. That is why despite more than 80% of the population in Uganda deriving a livelihood from agriculture it accounts for less than 40% of economic output and  the sector only manages single digit growth annually. And that is why the rural areas have not been the major beneficiary of the economic growth of the last two decades.

Given our deficiencies in technology and finance makes a good case for public-private partnerships. To ensure the widescale effort we need to transform rural production, government is the only credible partner large scale investors can partner with as Rwanda is demonstrating. Government can make land available, construct roads or other transport infrastructure to target areas and provide tax relief.

Government’s goal is a social one to improve the welfare of its citizens, business driven by the profit motive, the trick is to align these goals in order to ensure sustainability of such projects. Without regulation profit will supersede the social motive resulting in exploitation of labour, super profits and pollution. If the social motive on the other hand takes precedence  production will suffer and the enterprise will buried under the weight of its losses or government will spend  billions subsidizing it, which monies could have been used in providing social services or building roads.

Stiglitz and Clinton know a thing or two about creating economic growth. Stiglitz served on Clinton’s Council of Economic Advisors for four years from 1993 the last two of which he chaired the council.

The two would therefore take part of the credit for the economic boom in their country that started in the Clinton era before coming to shuddering halt four years ago with the beginning of the current global financial crisis.

Some would say they laid the seeds of the crisis too but that maybe a discussion for another day

BAD BLACK AND THE UGANDAN CONDITION

The Bad Black show was finally brought to a close with the conviction of Shanita Namuyimbwa on Wednesday for defrauding a company set up by her ex-boyfriend of several billion.

There were many things wrong with this case – How does a young woman with no certifiable skill (marketable skill is another thing), no prior experience as an investor and probably no bank account, extract sh11b from her lover?

What kind of money does David Greenhalgh make to dish out billions of shillings after a night of passion? Maybe he thought he was in Zimbabwe?

And what happened to the famed stinginess of the rich man?

And the question on many people’s lips, Couldn’t she have saved or invested some of those billions, instead of blowing it on fly by night friends, dodgy booze and an atrocious wardrobe? Don’t get us started about her beautician.

It says something about us that she lived the Ugandan dream: Hit the big “deal” (The Luganda corruption Dilu rolls off the tongue better), without much effort so people can call you “shrewd”, then go out and announce your “good fortune” with flashy cars  legendary night outs and above all let everybody know you have arrived by buying some media attention.

To be fair to ourselves this is not a uniquely Ugandan dream – the west’s voyeurism of the rich and famous is a variation of the same theme. Our history of instability, which necessitated a hand-to-mouth existence, is probably to blame for our short term attention span, glorification of crooks and fraudsters and the denigration of hard, diligent work.

In the short time that her star blazed bright Bad Black probably raised hope that overnight success as a model is viable – never mind what you have to sell to get it.

Maybe as Betrand Russell once said “The whole problem with the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts,” explains why we gravitate towards such show ponies like Bad Black.

Or maybe we are living such dreary lives with one in five Ugandans living in abject poverty, inflation last year hit nearly 20-year highs and like the Romans in coliseum at the end of their empire, we need more and more bizarre entertainment to distract us from pain of everyday living?

As they say the only place where success comes ahead of work is in the dictionary.

But there is hope for our beloved country.

Life is becoming more regularized so much so that phenomena like Bad Black are an anomaly, an aberration on our landscape. Believe it or not there was a time when there were Bad Blacks at every street corner, admittedly hustling for smaller change, but hustling all the same.

Increased availability of everything from paraffin to TVs to dollars means that margins are thinning, the black market has vanished and a regular income can be stretched to the end of the month – only just.

Bad Black has been trucked off to prison but when we fail to sleep at night and allow for some self-reflection, we should remember her as a symbol of our shallow excesses, do penance for our myopic ways, clammer after substance over style and pray that we earn success through thoughtful and consistent application.

Not to stamp on a lady when she is down but Bad Black won the lottery and like many big time winners before her, she was unprepared for her windfall, squandered it and any goodwill she may have had went with it. It may not be bad thing for her that she is going to have plenty of time to re-examine her life.

Hopefully now that she is under lock and key unlikely to dazzle us with her garish style and rural expression of urban excitement we can all get back to doing a honest day’s work.

BECAUSE EUROPE IS NOT UGANDA

In the 1980s Uganda like many African economies, was in big trouble.

Revenues were low, meaning the government could not provide much needed social services and other public goods. This had the effect of depressing private sector activity, killing any hope of tax collection. Meanwhile even the little revenue government was collecting wasvanishing into the black hole that was parastatal sector. The only thing that was thriving was the black market in hard currency as exports had slowed to a dribble.

To sort out the mess the government needed to raise production and then capture the taxes from this increased output. It was a simple formula but not easy to execute.

Government needed to jump start the private sector by first reining in inflation and rehabilitating the infrastructure. In addition government needed to stem the public sector hemorrhage by reforming and privatizing parastatals, as well as taking away their long held monopolies.

Twenty odd years later the private sector is more vibrant, revenues are up to the point that government is financing two thirds of the budget. However the benefits have not been enjoyed equitably across society, a situation which still needs to be redressed without jeopardising economic growth.

Understandably it was always going to be a politically expensive operation but there really was no plan B.

What is going on in Europe – more specifically Portugal, Italy, Greece, Spain mirrors our situation in the 1980s with the slight variation that their debt load has reached unsustainable levels – the last I saw Greece’s public debt was at 165% the size of the economy.

The proposed prescription to their predicament is much the same as the one we painfully swallowed.

The electorates of southern Europe, it seems are not willing to take the pain, protesting at every turn against the proposed austerity measures, pushing the Eurozone to the point of disintegration.

A case of the doctor not willing to take his own medicine?

The stakes are much higher of course – after all who cares if some poor African country falls off the face of the earth?

Europe will serve as a perfect test case for the saying what is popular is not always right and what is right is not always popular.

The old world has got itself into this situation through populism and to extricate themselves they are going to have to force through some hard reforms.

It’s no time to be smug. The Euro zone crisis is affecting us too, with lower demand for our exports, lower remittances from our relatives abroad and the less aid.

Which might not entirely be a bad thing.

Living off the fat of the west slowed any progress towards developing and mobilizing our own resources, cultivating internal and regional markets and nurturing meaningful continental alliances.

They say that when the tide falls you will know who was swimming naked. This crisis will show how far along our economy has grown by how it reacts to the crisis. But more importantly it will focus planners’ minds as they learn to live with lower handouts from the west.

And just as important, we are going to have to pay more attention to the markets around us to sustain us for the next several years. As it is now all our transport infrastructure is designed to extract from the hinterland and evacuate through the ports – a  colonial hangover. Now we will have to build roads which reflect the new appreciation of our own local and regional markets.

The long and short of it is this a crisis we should not let go unexploited.

DON’T LAUGH.UGANDA NEEDS CAPACITY BUILDING

Last month President Yoweri Museveni commissioned road maintenance equipment worth sh295b. The road maintenance units, one for every each of Uganda’s multitude of districts, were purchased on a loan from China.

In the spirit of investing more in infrastructure development with the intention of cutting down the cost of getting to market for our produce and products, it’s a step in the right direction.

My initial optimism was deflated last week by a friend in government who should know about these things. On the surface of it the biggest challenge I thought, would be the fuel to drive these units – did the districts have the budgets to run this equipment?

But I was shocked to find that the problem would actually be worse than that, that we do not have enough machine operators in the country to operate these road units. Surely we do, I protested. Just driving the earth movers, rollers around. My friend assured me it is not a simple as it looks and requires specialized knowledge in order that good work is done.

It is a problem enough that Economic monitoring minister Henry Banyenzaki told a dialogue on trade and wealth creation last week convened by the African Center for Trade and Development (ACTADE), that one of the reason billions of Uganda shillings in aid money goes unused is simply a lack of human capacity to execute the projects.

We have an inadequacy of skills right up the line from the most basic to the extremely sophisticated.

In order to get the job down in whatever endeavor you need strategic process, which is the road map to convert a vision into reality, operational process, which will actualize the plan and the human resource, which goes without saying. You can be as strategic as you want or have the most perfect workflow plans the world has ever seen but without the right people everything done is as good as useless.

My friend who should know, knew of no government statistics that could accurately reflect the skills’ shortages in this country so I had to make do with those I could glean off the net.

The doctor to patient ratio stands between 6 to 8 doctors per 100,000 Ugandans depending on which sites you visit.  So for our population of the 35 million we have under 2500 doctors. Statistically speaking Kampala with a day time population has 12 doctors.

The World Health Organisation’s (WHO) recommended minimum is ten for every 100,000, meaning we would need at 700 new doctors to meet the WHO standard.

I am reliably informed that all our medical schools do not graduate more than 200 doctors a year.

The same statistics show that Seychelles has the best ratio on the continent with 151 doctors per 100,000 patients. In the region Kenya has 14, Rwanda five, Burundi three and Tanzania two.

And this dismal state of affairs goes across the profession from the lowliest health workers to the specialists. The same story is found in in veterinary medicine, agriculture and forestry, engineering, accounting or any number of fields you can think of.

At the heart of our many problems wherever you look, is a lack of capacity – this is before we even consider competence and integrity.

Training takes time. Think about it, of all the kids who enrolled in P1 under UPE in 1997 none has graduated from university yet.

Looking back Uganda started with universal primary education 15 years ago and has been in the process of rolling out the secondary school equivalent. Both far from perfect attempts but a start anyway. More recently government has raised the incentives for science teachers and has plans to construct and equip science labs across the country.  In addition government is putting in more money in business, technical and vocational education and training.

Government may consider incentivizing private investment in education to speed up the process. But before we start throwing money at the problem we need to get a more accurate assessment of the extent of the problem beyond anecdotal evidence.

Unfortunately in our poor countries with finite resources and pressing needs that are all urgent --- what do you do first? Roads? Hospitals? Schools? Unfortunately we do not have the luxury of sequencing.

INVESTING IN UGANDA NOT FOR THE FAINT HEARTED

In March this column reported  how cement manufacturers Hima had woken up in January to find they had been dispossesed of the right to mine one of their major quarries.

Previously unknown firm African Gold Sniffers Ltd (you really can’t make this up), had with the help from an official in the geology department of the energy & mineral development ministry, acquired the mining rights to Hima quarry – one of two quarries, the  other being Dura that the cement producers use for manufacture.

Mining concessions change hands every so often but what was interesting with this particular case was that Hima’s concession was not due to expire for another year, it expires at the end of December 2012, and therefore not due for renewal or termination.

The transfer was even the more stranger because, the local arm of worldwide cement manfacturer LeFarge had only months before commissioned a $120m (sh300b) plant on the basis of the Hima quarry, which was to double their production to 850,000 tonnes annually.

The plot thickened even further when investigations showed that the Sniffers had got the full exploration license in under 19 days – including weekends, for a process which takes months if not years to consummate. This must be a record in efficiency for the Ugandan civil service.

The Sniffers wasted no time in asking Hima to vacate the quarry so they can take possession. This was the first Hima heard of the whole nefarious affair. One would have thought with millions of dollars on the line and having been a long term investor and with full knowledge of Hima’s business plan for the next 25 years, the geology department would have appraised Hima of what was going on. Even if out of basic courtesy.

Since I wrote the article in March the responsible – or irresponsible, official in the geology department is being investigated and the concession is back with Hima. Incredulously Sniffers are crying foul and are sniffing around for compensation.

This story is a familiar one and readers will be forgiven for nodding their heads knowingly and moving on to the next story.

Not to sound clichéd but these kind of machinations are at the heart of what ails this country and keeps the majority of our people suffering sub human existences...

Uganda badly needs investors – local and foreign, to unlock the wealth in its vast bounty of natural resources.

Any investor worth his salt has to be assured that his property rights are guaranteed by the state.  No serious investor is going to put in any money in an endevour in which he is not assured of at least recouping his investment. 

An exploration of why capitalism works in certain places and not in others, finds that insecurity of property rights is at the center of market failure. What happens is if an investor – local or foreign, is unsure of the security of his property rights, they tend to veer towards short term speculation, which requires little capital input and through overpricing is guaranteed to show returns in double quick time. Such investors will not create many jobs, invest in technology or even pay much tax. Clearly not the kind of investor Uganda is looking for...

They say capital is a coward. Capital would rather take lower returns on investment, which are more assured than gun for higher returns, which are not as assured.

Word gets around. What has happened to the local arm of global cement manufacturing giant, LeFarge will be discussed over cocktails in London, New York, Paris and now after reading this probably in your local kafunda as well. And investors will wonder why suffer this grief and rather invest in another more transparent country or for you in the kafunda, why not buy treasury bills and bonds and save yourself the stress.

To state the obvious, a country is only as viable as its private sector. The private sector pays tax and creates jobs. In Uganda over the last two decades as the private sector has grown their taxes account for more than two thirds of the budget. In the eighties local taxes accounted for less than a third of the budget, with the rest coming from aid. Without a private sector a country is vulnerable and despite outside pretensions, collapse is never far away – ask the Union of Soviet Socialist Republics.

"We cannot treat investors – local or foreign as if we are doing them a favour. They risk money to make money, in so doing create jobs and pay us taxes. We may debate whether the taxes they pay are properly utilized but that is a debate for another day...

Ugandans need a chance and long term credible investors are what we are looking for unless one is sniffing  stuff more potent than cement or is that gold?.

THE CASE FOR UGANDA'S DEVELOPMENT BONDS

Almost  15 years ago the then Secretary to the Treasury and Finance ministry Permanent Secretary Emmanule Tumusiime Mutebile said the government was considering floating bonds to finance infrastructure development.

Months later the Mutebile said they had shelved the idea because borrowing locally was much more expensive than taking out a World Bank loan.

The World Bank’s   concessionary loans often cost about 1.75% over 40 years with a 10 year grace period.  Uganda’s ten year bond, the longest tenure we have had has rarely dipped below double digit yield at the best of times. So on the surface of it the mathematical logic behind government U-turn cannot be faulted.

However government went ahead to start issuing two, three, five and ten year bonds but solely for use as monetary instruments – to mop excess liquidity and keep inflation in check.

As a result the market has developed a level of confidence in our bond auctions, setting the stage for further developments in our local bond market.

Enter President Yoweri Museveni and his proposal two weeks ago that government would look to tap NSSF’s  sh2,800b war chest to finance its infrastructure ambitions. The suggestion threw up an uproar with the consensus being that given the government’s corruption record workers’ were wary of lending to government.

To be charitable, the furor could be put down to knee jerk reaction. NSSF is already the single largest participant lender to government through its participation in the treasury bill and bond auctions.

If workers really wanted to complain about lending to government it would be on the grounds that the yields on bills and bonds are the lowest borrowing rates in the market. This is so because governments are supposedly the safest borrowers. Government  does not default on its loans.
But as Museveni admitted even NSSF’s holdings in their entirety are not sufficient to bankroll a road construction program that could cost sh4,000b over the next five years.

This speaks to the issue of our saving culture or lack of thereof. Currently the savings as ratio to GDP is only 10 percent much lower than the sub-Saharan Africa average of 18 % or East Asia’s 43%. Of course the argument is that we do not save in the formal financial system but in brick and mortar and other alternative means – cows, chicken and ducks.

That kind of saving because it does not aggregate funds, is very inefficient with little society wide benefits. One financial expert estimated that at three in every five shillings in circulation is not in the formal sector, but scattered under our mattress, in our ceilings and holes in the ground.

Now that donor money is going to be constrained for coming years government needs to help push up savings rates. The statute that governs the NSSF was a good start mandating all workers to save five percent of their pay to go towards their retirement benefits. The employer contributes and additional 10% of the workers salary. NSSF does not only have the largest pool of money  of any financial institution but also the largest pool of long term savings in a country which as none to speak of.

For starters government can expedite the liberalization of the pension sector. As it is now we are all mandated to contribute to NSSF . Liberalization would introduce competition into the sector  and workers may get much better terms elsewhere.

In addition government should make saving for retirement tax deductible. As it is now income tax is levied on salary gross giving little incentive for workers to save more. If for example government said that  workers saving up to 20% of salary will not suffer tax on those savings, it is possible people will store away more money for their retirement increasing  the much needed pool of long term financing.

Of course with more long term finance sloshing around it will be much cheaper to finance industry and even real estate development hence create much needed jobs.

Back Museveni’s plan to “raid” workers money. If government issued an infrastructure development bond, NSSF would not be the only participant, with interest coming from any other number of players locally, regionally and internationally.

Government’s repayment record in the bond market is not in doubt the only question is can government execute the projects properly that these funds are intended for.

THE CHALLENGE OF BUDGETTING FOR A POOR UGANDA

Last week Spanish Prime minster Mariano Rajoy in a text to his finance minister urging him to hold out for a better deal in negotiations for a bailout of Spanish banks said. “We are the number four power in Europe. Spain is not Uganda.”

When the text was released the Uganda social media chattering classes went into overdrive, so much so that the furor became a story on the BBC.

Spain is a much richer country than Uganda based on per capita figures alone -- $31,000 for Spain and $1,250 for Uganda adjusted for living standards ion the respective nations. But their economy is in much sorrier state. Their economy is contracting, they are suffering the after effects of property bubble burst and their banks are hobbled with so much bad debt that their collapse could threaten the future of the Euro zone. The bailout of the banks could cost upwards of $100b according to conservative estimates.

Finance minister Maria Kiwanuka read her second budget on Thursday and it was very hard to see the glass as half full.

The economic growth halved to 3.2% from the previous year, revenue collections came in short of budget and more than 10 million people are living in abject poverty, more if you do away with the subhuman requirements – living on less than a dollar a day, abject poverty calculations entail.

"Our situation compared to Spain is not unlike the situation US billionaire Donald Trump found himself in the 1990s when pointing out that the beggar on the street was much better off than he was. Whereas the beggar had nothing to his name Trump was indebted to the tune of billions of dollars. The pan handler is probably still where he is while Trump is now stronger than ever....

Faced with the challenge of making investments that will spur more and more growth – good economics, and on the other hand dribbling in the hard decisions over time versus all at once – good politics, you had the sense Kiwanuka was struggling.

With our ratio of revenues to GDP largely unchanged for the last decade and donors tightening their purse strings while our expenditure demands continue to grow with a rising population, something has to give. And that most likely will be a tightening of our own belts in the short term or until investments like the power dams and roads push up productivity and hopefully improve our lives in the process.

Our needs are huge. In the budget the minister pushed up the works ministry’s budget up almost twice in order to steer more and more of the budget towards road construction and rehabilitation. We upped the education budget almost by a fifth. These two are key to future growth of nations.

Analysts who started watching China three decades ago reported that they were investing a lot on building ports, road, rail and other communication networks. They poured in prodigious amounts into their education systems especially science and technology. They have been doing this consistently for more than 30 years and are not letting up now as the second largest economy in the world. The challenge with infrastructure and more so health and education is that the returns on investment may take decades to show...

Political pressures often prevents countries from making the long term sustained investment required to attain take off.

The noises from government suggest the they are prepared to take the tough political decisions to lay the foundation for takeoff. We have done it before and we can do it again.

In the 1980s the Ugandan economy was a pale shadow of its current self: Revenues were anemic, the public sectors were hemorrhaging even the little we were collecting and in addition stifling the private sector through its monopoly corporations. In order to turn it around government privatized the companies liberalized the markets and focused on stabilising the economy. All politically unpopular decisions at the time, but we bit the bullet and as an economy we are better from the experience.

Back to the #SpainisnotUganda protest. Spain has the advantage of having access to the bigger markets of Europe and so access to credit, expertise and all it would take to turn it around are all within reach. But Spain is going to have to take many politically unpopular decisions, expect a series of fallen governments as they try to dig themselves out of their current economic woes.

As for Uganda expect more belt tightening in coming years as we try to make the long term choices needed to move us to the next level.