Commentary & Letters

Why Uganda (and Africa) remains poor

By Andrew M. Mwenda

And so it was that on Friday afternoon last week I attended the Joseph Mubiru Memorial Lecture hosted by Bank of Uganda and featuring Prof. Ha Joon Chang of the University of Cambridge. A brilliant economist lecturer of South Korea descent, Ha is one of the smartest and unorthodox thinkers I have read. I owe him a huge intellectual debt because he has greatly influenced my thinking even though we have never met. Three of his books – Kicking Away The Ladder, Bad Samaritans and 23 Things They Don’t Teach You About Capitalism – are a must read.

The lecture came four days after President Yoweri Museveni invited me to State House to discuss manufacturing in Uganda. He asked me to go see how with available electricity, factories are springing up in the Namanve Industrial Park. I told the president that while  investments in infrastructures like dams, transmission and distribution lines for electricity; roads, expressways, railways, water systems and airports are absolutely necessary, they are insufficient to drive the kind manufacturing growth Uganda needs.

Museveni superintends over a state with an economic bureaucracy, especially in the ministry of finance and the central bank, whose ideological leanings are hostile to the idea of industrial policy. And while most Ugandan elites may be sympathetic to the idea of industrial policy, they are hostile to the implications of the actions poor nations that seek to industrialize must accommodate. These two factors explain why Museveni has not argued for industrial policy. Uganda’s industrial policy is to have no industrial policy. This had led Museveni to constantly make ineffective ad hoc interventions to support this or that investor whenever reality confronts him.

There is no country in the world where agriculture employs 80% of the labor force that has a per capita income of more than $1,000. So dependence on agriculture is synonymous with poverty. And save for finding huge rich mineral deposits and managing them well, no big country has jumped from an agricultural to a service economy and become rich. So Uganda must seek to industrialize if it wants to become rich. But to do this it has to develop an industrial policy. There is a tool box for industrialization from historic experience.

First, the leading manufacturing firms in the sectors Uganda considers necessary for her transformation have to be owned by Ugandans. This is because, as a rule,  multinational corporations do not transfer the most valuable aspects of their business to their subsidiaries. Ha Joon-Chang repeated this point. So without local entrepreneurs taking the lead, we can assemble products but we will not be able to manufacture them. So Uganda needs to liberate herself from the “foreign investors” syndrome.

Why? All countries that have developed did so by selling abroad (exports) more value than they bought from there (imports). In economics it is called terms of trade. And international trade is a form of hierarchy: some countries produce cotton, others weave cloth while others market high fashion. Some nations mine iron ore, others make steel while others sell automobiles. How much you earn from international trade depends on the niche you occupy in this value chain.

Those who produce and sell raw cotton earn 1.9% of the international market price; those who weave cloth take about 12% while those who sell high fashion like Louis Vuitton, Gucci or Hugo Boss take 65%. The same applies to the niche one occupies in the value chain of iron ore, steel and automobiles. Being relegated to a producer and exporter or raw cotton or iron ore means remaining perpetually poor.

I am typing this argument on an iPhone. On its back it says: designed in California, assembled in China. Note that research, development, design and marketing of the iPhone which are done in the USA constitute 65% of the value of the iPhone. Assembling takes 15%. Therefore while China gets 15% of the value of the iPhone, USA gets a cool 65%. This is why China is in the mad-rush to develop her own smart phones in order to capture the 65%. DR Congo that sells Coltan from which these phones are made gets about 2%. So America eats the iPhone dinner, China the leftovers while DRC gets crumbs.

Second, if we are to industrialize, then we have to adopt industrial policy to protect our infant factories from the cold winds of international competition. Such policies would include instruments such as tax holidays, subsidies, access to cheap long term credit, free prime land, high tariffs on imported substitutes etc. This places the state in a position to choose which sectors and firms to get these benefits. And here is the challenge Africa faces.

Industrial policy creates huge profits for certain sectors and the firms entering it. This means that public officials have power to allocate lucrative rights over scarce resources. It is inevitable that they will bargain for a share of the profits they allocate. Therefore it is inevitable that such a process will lead to cronyism, favoritism and corruption. It also means that the allocation of such benefits will be political, not technical i.e. they will be given on the basis of political connection than business merit. Now the two are not necessarily mutually exclusive. So one has to know that no government can place resources in the hands of those likely to use them against it.

Therefore if Museveni is in power, those investors who support Kizza Besigye will be excluded from the benefits of industrial policy. Equally the Besigye government will not give such benefits to Sam Kutesa and Salim Saleh. One can sit and moralize about this. But human nature does not allow for such an ideal neutral state. It is only found in books of academics who rewrite history, as Ha candidly said. In fact even in heaven God promises no gifts to those of his angels who rebelled with Lucifer. So favoritism is from God the almighty.

Third, once you begin industrial policy and its associated favors, you must be willing to accept and accommodate a lot of failures. In allocating subsidies and cheap long term credit to favored firms, the state will be playing the role of investment banker and venture capitalist. Even in the private sector like venture capital in the Silicon Valley, they will tell you that the average success rate is one in ten. A 20% success rate is considered excellent. So at best government  will support 10 firms and be lucky to get two to succeed.

Can the Ugandan elite tolerate any president and government throwing taxpayers’ money at its cronies and seeing many of them fail – or only to have one or two succeed? This is the real challenge that poor nations face. Because the failure rate is high, it can cause serious political contestations that can even bring a government down.

The point Ha did not make last Friday was made by Karl Marx over 170 year ago. By its nature, Marx said capitalism grows through the “primitive accumulation of capital.” But for late industrializers without colonies to plunder, industrialization tends to get locally politicized because all the dirty work is done at home. Whether a country succeeds or not has more to do with its politics than its policies.

South Korea and Pakistan had a similar industrial policy in the 1960s of allocating lucrative rights to a small select group of industrial houses. South Korea succeed, creating Hyundai, Sam Sung, LG, Kia etc. Pakistan degenerated into civil war and the eventual dismemberment of the state. Why? South Korea achieved a minimum internal consensus among its elites for such policies. In Pakistan, those who felt excluded from the lucrative rights were able to successfully contest their exclusion leading to civil war.

If our governments in Africa have not sought industrial policy, it is because they depend on IMF and World Bank for advice. But it is also because ideologically, African elites are naive, ignorant of history and moralistic. They do not know the implications of industrial policy or are not willing to accept them – favoritism, cronyism and corruption. This has led to lack of  a political consensus among our elites on industrial policy. For instance, can a president Museveni or Besigye finance 10 firms and only one succeeds and he survives in office? That is the challenge.

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