6 December 2017

Uganda: Experts - Why Selling Off UCB, UEB Was Wrong

opinion

Free markets have not brought industrialisation and economic success to Uganda. Can the country's pilots acknowledge they got it wrong and search for a different path, writes ALON MWESIGWA.

"If you're a free markets advocate and driving a Toyota, you don't know what you are talking about," this was the opening remark by University of Cambridge academic Dr Ha-Joon Chang at last week's 25th Joseph Mubiru memorial lecture hosted by Bank of Uganda.

Toyota is a Japanese brand, selling vehicles globally. The company was nurtured by the Japanese government with heavy state subsidies in the 1940s. Japan banned imports from advanced American and British motor industries.

In the analogy, Dr Chang's message is clear: no country should expose its strategic industries to foreign competition prematurely.

"All of today's rich countries, except for the Netherlands and (pre-WW1) Switzerland, used protectionism for substantial periods in order to develop their economies," Dr Chang said.

To Ugandans, this confirms that we chose the wrong runway at take-off. Between the late 1980s and early 1990s, Uganda swallowed the Structural Adjustment Programmes (SAPs) imposed by the Bretton Woods institutions, selling off state enterprises and throwing the economy wide open.

Uganda's economy was struggling, reeling in debt, run-away inflation and dealing with the after-effects of the debilitating war, which brought the NRM government to power. Champions of free markets - the International Monetary Fund and the World Bank - made SAPs a precondition for aid and debt forgiveness.

On paper, growth figures improved, poverty statistics dropped and the West declared Uganda a development role model.

Uganda reached this point by religiously following the SAPs in spite of the corruption-riddled privatisation enterprise, cutting public spending and devaluing the shilling, according to former Washington Post columnist Sebastian Mallaby in his book The World's Banker. But this was unsustainable and never resulted in rapid industrialisation.

Today, three quarters of Ugandans are stuck in subsistence farming. Manufacturing has failed to take off. Chang said advanced countries which preach free markets never followed this route. Instead, he said, they increased tariffs to keep foreign competition at bay.

They also restricted importation of luxurious goods and encouraged importation of raw materials and capital goods. In what he described as kicking away the ladder, Dr Chang said it was ironical that the rich are telling poor countries to do differently.

"State ownership kick-started industrialisation in Germany (for steel and textile) and Japan (steel and ship building)," said Dr Chang.

Several industries in Uganda, including the textile and leather have collapsed in the face of cheap imports. The country relies on primary commodities like coffee, which are vulnerable to multiple shocks. Unemployment is at an all-time high.

Free markets disciples in Uganda quickly say government has no business running businesses and point at the financial sector, which has benefitted mainly from trading in safe government paper, as a success story. But rich countries maintained a grip on their financial sectors, guaranteeing affordable credit to strategic industries.

Analysts say Uganda should not have surrendered strategic enterprises like the state-owned Uganda Commercial Bank (UCB), utilities like Uganda Electricity Board, and others, to the private sector. The government complains about high interest rates and cost of electricity and now concedes it was a mistake to sell off UCB and UEB.

Dr Chang said Finland, one of the most advanced economies, classified all firms with more than 20 per cent foreign ownership as "dangerous enterprises" between the 1930s and the 1980s.

"No foreign bank branches in Finland until the early 1980s," Chang said.

Taiwan and South Korea, which were at the same level of development with Uganda in the 1960s are now industrialised. Both largely protected their economies.

"Even when their average tariff rate was not so high, today's rich countries often provided high protection for strategic industries," Chang said.

"In the USA, state-owned enterprises (SOEs) account for only about one per cent of US GDP, but the country has had one of the most successful SOEs in human history - except it is not called SOE. It's the US Military," he said.

Dr Chang said Britain and USA, the champions of free markets, had the highest tariffs in the early stages. Tariffs are a tool used to protect local industries.

"Pragmatism actually requires a very high degree of imagination, you can be truly pragmatic only when you can liberate yourself from the shackles of ideological prejudices, conventional wisdom, and historical myths and dare to imagine a different future," Dr Chang said. He warned, though, that not all intervention works; policies must be designed well.

Deputy BOU Governor Dr Louis Kasekende said: "We agree that we cannot keep on doing things the same way."

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