Suspects to head back to jail. (Photo Courtesy New Vision)

Subsidising key growth sectors that have potential to improve the wealth of inhabitants has grown nations

I was intrigued by the article "Let the Free Market work" by Andrew Mwenda (The Independent Issue of October 7-13, 2011).

Mwenda argues that there is no need to subsidise the cost of electricity because it "encourages bad behavior on the part of users". He also makes a strong case for allowing the price mechanism to work in the sector. "The forces of demand and supply will always produce an equilibrium price that will eliminate shortages," he asserts.

This assessment is based on wrong assumptions that have largely kept Uganda's growth and productivity one of the lowest in the world. Like a toolbox in a car, the contents of a policy clearly indicate what outcomes a repairman expects out of an economy.

The elite in the EU and USA which, through its lending arms, seeks to keep developing nations as producers of strategic raw materials to feed their industries in the north have made Mwenda's argument for the last 30 years. Sadly the elite of Africa now think this is the only way to grow nations.

Subsidising key growth sectors that have potential to improve the wealth of inhabitants has in the last 500 years been the key tool that has grown nations that now outlaw it in poor nations.

From the Venetian glass (Republic of Venice) and salt subsidies in the 1450s to England's protection of wool and cotton in 1485 under King Henry VI, to America's steel industry in the 1860s up to the EU and US's extreme subsidies to farmers today, the wealth of nations has been protected, preserved, defended with a weapon called 'subsidies'.

This is the same story for the recent East Asian economies of Japan and Korea in the 1970s and 1980s. As we all know, the nation of Japan is the least importer of anything in the world and one of the largest exporters of automobiles and electronics.

We have lost key skills and productivity in strategic sectors because of our wholesale abandonment of the key gains in the 1960s, the destruction of the civil and industrial structure by former president Idi Amin, and the subsequent wholesale privatisation of all commercial public institutions by the NRM government.

The industries which had been protected such as agriculture, transport and other import substitution sectors, have now been left to free fall as Europe, the USA and China flood our market with cheap goods and services.

What is worse is that it has destroyed even the slightest pretensions at building an independent economy and created a heavily dependent attitude running through our civil service and key planners.

There is no country without a home-grown industrial base that has ever managed to raise the wage of its producers and take a population to greater wealth. That type of industrial sector heavily relies among other things, on availability of cheap electricity.

The question should not be a subsidy per se. It should be about the elements that a subsidy cures. If we take subsidies at face value, then we should question why governments must build roads and schools and hospitals for these are subsidies too! The private sector could build own dams and roads if you wish to but these would never create the critical capacity needed to drive a nation. This is the reason nations tax and spend on these facilities.

Electricity is a strategic trigger to productivity even in its very lowest form as just lighting for a room. As a person who spent seven of my early years of school reading on a "tadooba" (paraffin wick lamp) I understand the value of a light bulb in a house in a village. Light on a hill extends man-hours of small-holder farmers, brings innovations in cooling and storage of perishable foods, and becomes a concentration for urbanisation with its attendant arts and professional growth. It generally improves productivity. I am therefore appalled at the elitist argument that the few who can afford electricity should not be "disturbed" by the majority who cannot afford and who overload the grid because of a subsidy.

The problem of Uganda is not consumption of electricity. It is constrained supply. This limited supply is a product of our incapacity as a nation to prioritise and to think independently. Power outages were common in the 1990s and we experience them today in a recurring fashion because we have poor planners who "learn nothing and forget nothing" like the Bourbon rulers of France in the 1820s. The money spent on diesel-fired generators is an expression of failure to plan and must not in any way demean the need for power for a growing population.

A well thought out subsidy, which increases our supply capacity, should be supported including if it promotes consumption. Consumption is not necessarily bad. It is good for business.

Mwenda's other misplaced argument is that the forces of demand and supply will always stabilise the price. The 'invisible hand of the 'market is not necessarily holy. History shows us it is tinkered with in order to take a direction a nation wants to go for growth. The 'invisible hand' was an argument David Ricardo and Adam Smith, the two proponents of British economic domination of the world, advanced heavily in support of globalisation to keep England competitive in the 17th and 18th century. This was a time when the American colonies were breaking away to set up their own industries. The American war of independence in 1770s was about freedom to start own textile and steel industries.

Let us take an example of modern day patents and tariffs as subsidies that tinker with the market in the EU and USA. It is not possible to produce certain products and services, even if we might be able to, in Africa because the developed nations have put up walls in form of patents (to protect knowledge and retain it at a higher price) and tariffs (to trigger production for an increasing wage in their home countries). These two tools by the developed world seek to protect jobs and a higher standard of living for their people while encouraging dumping in developing countries.

The pro-market argument is selectively used yet we know that the developed world has little faith in it. The equilibrium, Mwenda is looking for, can only be achieved when the supply side of our economy is addressed.

A lot of our elite focus on the demand side of the economy and forget the supply constraints holding our productivity down. Without their removal, our economy remains anaemic and growth out of poverty is heavily curtailed. On their own, the market forces will keep our productivity low and simply open the gates for cheap labour, technologies, products and services. The market must be tweaked (in the national interest) in order for it to grow strategic sectors of the economy that would otherwise regress and condemn more people into poverty.

Finally, Mwenda's argument that high food prices benefit the poor majority is not entirely correct. I am a farmer and I know that just because there is a spike in prices, does not mean there is an immediate and sustained increase in my income from my milk and egg sales.

As we all know, the supply of agricultural commodities is rigid and inelastic. In other words, I do not milk more cows or rear more chickens just because there is a price increase. I must improve the feeds, increase the herd yield and employ more milkers. These are not things that follow the price in the short run. The spike in prices still benefits the middlemen who buy my milk and many times, speculate on it by hoarding and cooling it in transport tankers, to get a higher price, long after they have left my farm. It is these middlemen who are now using the Commercial Farmers Loan scheme (CFLS) of the government and getting a higher short-term return and not the real farmers, generally. The real farmers invest over a long period and the turnaround is not attractive for speculators who prefer quick gains.

The solution to the farmer is improving their productivity by focusing on standards of production that give long-term advantage. This solution is mechanisation and processing at farm level so that the farmer is able to hold down the price and negotiate better terms.

I welcome a subsidy that triggers this kind of change because in the long run, there are more jobs created, more real wealth generated in backyard villages, better suited technology transfer and more consumers created in our nation. To do this, a farmer must have subsidised electricity, machinery and access to improved breed, water, and irrigation facilities. This should make sense to whoever is interested in bringing large numbers of Ugandans out of poverty in a much more consistent and sustained manner.

Odrek Rwabwogo, is the Director Strategy & Expansion of The TERP Group