About me.


Monday, January 16, 2017

Economic growth Vs development

Don’t judge Uganda by where it is but by the speed at which it is growing 

I have been arguing that Uganda’s economy has been growing at an impressive rate over the last 30 years. Many readers have written to me saying that although we are growing economically, we are not developing. This shows a misunderstanding of the relationship between growth and development. Economic growth refers to a quantitative increase in the goods and services produced within an economy in a given period of time. Development is a qualitative increase in the same.

For a country to develop, it has to grow over a very long period of time. Economic growth is, therefore, the mother of economic development. No country can develop without sustaining economic growth over decades. And no country can sustain economic growth for decades and does not develop. This is because growth over the long run is only possible by changes in technology and in the mode of organisation. Therefore, long run growth fosters structural change i.e. development.

How does our country fit in this story? We cannot judge Uganda by where it is but by the speed at which it is growing towards a particular level of per capita income. Even with all its weaknesses, GDP per capita remains the best proxy to measure the wellbeing of a country. Per capita income gives us an idea of potential per capita revenue, which in turn gives us an idea of per capita spending. How much a government spends per person has powerful implications on its ability to provide a large basket of public goods and services to its citizens in order to improve their wellbeing.

Over the last 30 years of President Yoweri Museveni’s rule, Uganda’s growth has averaged 6.74% per year, making it the 17th fastest growing economy in the world, the 4th fastest in Africa out of 189 countries on the IMF list. When you remove mineral rich countries from the sample (because they are enjoying God’s or nature’s bounty), Uganda is the 10th fastest growing economy in the world, first in Africa.

But why is our country still poor with a per capita income of $670 in nominal dollars (depending on the exchange rate) and $2003 at purchasing power parity? The best explanation can be found in what economists and statisticians call “The Rule of 72.” It states that if anything under measurement grows at an annual rate of 1%, it would double every 72 years. But if anything grew at an annual rate of 7%, it would double every 10 years. Now 7% is about the fastest rate of GDP growth any country has registered over a long period of time, 25 years.

This means it takes very long to realise fundamental differences (structural transformation) when you begin from a very low base. Imagine a country that begins at a per capita income of $150 today and grows at the supersonic speed of 7% per year. In the first ten years, it will reach $300, in 20 years $600, in 30 years $1,200. There isn’t a fundamental difference between a country with a per capita income of $300 and that of $1,200. They would all still be regarded as poor. Yet sustaining high rates of GDP growth, leave alone per capita income growth, over the long term is very difficult.

In his book “The Next Convergence”, the Nobel laureate in economics, Michael Spence, found that between 1950 and 2005 only 13 countries in the entire world sustained an average rate of GDP growth of 7% and above. Uganda’s 6.74% growth over the last 30 years is close to the world’s best record. Also remember that per capita income is calculated by deducting the rate of population growth (Uganda’s average over the last 30 years is 3.24) from GDP growth. Therefore, Uganda’s per capita income has been growing at an annual average rate of 3.5%.

Hence, although Uganda has been able to almost double GDP every 10 years, it could only double per capita income every 20 years. Uganda’s per capita income was $403 in 1986. But this figure is misleading because at that time the price of the dollar was determined by government, not market forces. The only way to get an accurate figure is to find the price of the dollar on the black market in 1986, which I have failed. The foreign exchange rate was liberalised in 1991 and Uganda’s per capita income fell to $160 ($283 in 2016 prices). Today it is about $670 depending on the exchange rate.

If you think Uganda is crawling, look at this: the USA has the world’s 10th highest per capita income at $56,000. In fact it has the highest per capita income among large nations with a hinterland. This is because it sustained per capita income growth at an annual average rate of 2% between 1900 and 2010. In Europe only West Germany (between 1950 and 1975) sustained a higher per capita income growth rate (at 3.8%) than Uganda under Museveni. East Asia’s growth rates (at 5.8%) are therefore unprecedented historically.

Uganda’s per capita income growth has been severely undercut by a very high population growth rate, the second highest in the world. If our population grew at 1%, our per capita income would have grown at 5.74%, which is almost the average for East Asian nations (5.8%) during their intense period of transformation. Whom do we blame for our nation’s love of many children? The opposition is likely to say Museveni. Whoever is to blame, a high population growth rate means fewer working people paying for very many defendants, a factor that reduces the rate of savings and, therefore, investment.

Thus, Uganda is poor not because Museveni has performed poorly on the economy but because he began from a very low base and also because our people love to produce many children. Uganda reached a peak in per capita income in 1970. From then the economy declined till 1987. Museveni spent the first 13 years of his administration digging Uganda out of a pit, and our country regained her 1970 per capita income in 2000. That means we lost 30 years. In fact, the best way to judge Museveni is to begin in 2000.

Over the last 15 years, (2000 to 2014), Uganda’s economy grew at an annual average rate of 6.82% – an impressive number by historical standards. It has been the 19th fastest growing economy in the world, 10th in Africa. When we remove mineral rich nations from the sample, Uganda becomes 9th in the world, 3rd in Africa behind Ethiopia (1st) and Rwanda (2nd). Therefore, Uganda is on the right path economically.

No comments: