What Uganda needs to attain middle income status by 2020

By Thomas Bwire

Uganda’s Gross Domestic Product (GDP), in nominal terms, Uganda needs to meet a per capita income threshold of $1,033 to graduate to middle income status by 2020. Bank of Uganda economist Thomas Bwire looks at two key requirements to accelerate income growth in the country. The 2014 population census puts population growth rate at 3.03 per cent per annum and in the last five years, the exchange rate has depreciated at an annual rate of about 10 per cent. Uganda needs to meet a per capita income threshold of $1,033 (about Shs3.5 million) to graduate to middle income status by 2020. Holding population and GDP growth rates as is and allowing for a modest depreciation in the exchange rate of 7 per cent per annum, per capita income can be estimated at $817 (Shs2.8 million) in 2020, which is lower than the lower middle income threshold. The issue I am addressing is the feasible policy path ideal to propel Uganda to middle income status, though not necessarily by 2020.

Today, I focus on two key requirements to accelerate income growth in Uganda: increasing substantially private investment in modern sector industries, such as manufacturing, agro-processing and services; and modernizing smallholder agriculture. The effectiveness of these, however, is in turn dependent on other structural changes, such as accelerating the demographic transition – which I have discussed previously and improvements in the balance of payments (BoP) to decelerate exchange rate depreciation.
Boosting income growth
Accelerating income growth in Uganda requires sustained rapid growth in labour productivity in agriculture while at the same time transferring large numbers of workers from the agricultural sector into formal export oriented manufacturing industry, a path similar to the development success of the newly industrialized countries of East Asia. While Uganda has realized sustained real growth since the 1990s, structural transformation has been limited.
Transforming agriculture
Transforming agriculture will involve two possible policy strategies going forward. First, promoting private investment in large scale mechanized farming, though its feasibility may be severely constrained. Land tenure systems in Uganda are far too complex to allow private investors to gain the use of large tranches of land in a legitimate manner, and the social consequences of displacing smallholders to make way for large scale commercial farms will most likely intensify poverty among the rural households and probably trigger violent conflicts over land.
The second is comprehensive public support for the existing smallholders in the country to adopt more modern farm technologies and to move away from subsistence farming to begin producing for the market. Ad hoc piecemeal policies, such as subsidizing credit to a small minority of farmers, are merely scratching the surface of the problem. We need to strengthen research facilities to develop packages of farm technologies which can work in the specific conditions which farmers face in Uganda and put in place effective farm extension services to work with smallholders, improve storage facilities and access to markets.
Increasing private investment will require that these binding constraints are unlocked. Reforms to improve the institutional environment for doing business and the on-going improvements in critical components of public infrastructure are a positive step.
We also need to improve the vocational skills of the workforce to meet the requirements of modern industries, either through public vocational training institutions or by subsidizing the costs of training undertaken by private sector firms given the negative externalities which are involved – firms cannot be sure of retaining the workers that they have trained.
Balance of payment deficit
The exchange rate in Uganda is purely market determined, and is by and large, influenced by the imbalance in the Balance of Payment (BoP). Decelerating the exchange rate depreciation requires the country to undergo the green revolution in agriculture to increase marketable surpluses for export and increase investment particularly in long-term export industries, but with both backward and forward linkages. One such industry, according to Kenneth Egesa – a BoP expert, is iron ore, with about 260 million tonnes of confirmed deposits. Investing in such an industry a capacity utilization of about 10 million tonnes per year would generate the country a mix of increased exports and reduced imports of steel products, benefiting the BoP with about $700 million (Shs2.4 trillion) in revenue per year for 26 years.
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