{UAH} Why Uganda's NRM economic reforms failed to deliver

http://www.thelondoneveningpost.com/features/why-ugandas-nrm-economic-reforms-failed-to-deliver/

Why Uganda's NRM economic reforms failed to deliver

Posted on August 17, 2014 by Editorial Team

President Yoweri Museveni in deep thoughts at the recently-concluded US-Africa Summit in Washington DC.

By Eric Kashambuzi

To understand why the stabilization and structural adjustment program (SAP) came into being and why it failed to deliver and was abandoned worldwide in 2009, we need to go back to the mid-1970s.

Until then, the post-World War II global economy recorded rapid growth, low inflation, high employment and equitable distribution of benefits. By mid-1970s, the situation had reversed. The economy experienced low growth, high inflation and high unemployment or stagflation. The two oil crises in the 1970s made matters worse leading to global recession, and reduced demand for developing countries export commodities to developed country markets.

With abundance of petro-dollars, developing countries were encouraged to borrow hoping that they would be able to repay external debts when the global economy recovered from the recession. Sadly, the situation got worse as the 1980s unfolded and some countries, particularly in Latin America, were unable to repay the external debts threatening the health of the international financial system. The 1980s were recorded as the lost decade for Latin America and Africa.

To rescue these countries from default, they would receive financial and technical assistance largely from the International Monetary Fund (IMF) and the World Bank on condition they undertook stabilization and structural adjustment programs (SAPs) also known as the Washington Consensus (WC), neo-liberal or economic recovery programs. These policy reforms were originally intended for Latin American countries. The WC emphasized fiscal discipline; public expenditure priorities; tax reform;  financial liberalization; exchange rates; trade liberalization; foreign direct investment; privatization; deregulation and property rights (Louis Emmerij 1997).

According to John Brohman, "The message from the international financial institutions and their sponsors among Northern governments is that the South should do the following: allow market forces to determine patterns of resource allocation; remove state intervention in both external and internal markets; provide incentives to foreign capital for investment and job creation; accept outward-oriented growth according to principles of comparative advantage as the basic engine of development; and rely heavily on foreign experts to guide development and ensure efficient project selection"(John Brohman 1996). Economic growth, laissez-faire policies and trickle down mechanism were to serve as the engine of growth and equitable distribution of benefits with minimal state intervention.

When UPC under Obote II government came to power in 1981, it inherited external debt close to $1 billion and needed immediately external assistance of $800 million. Recognizing that Uganda had entered the 1980s in a state of underdevelopment and disrupted industrialization, UPC pledged to pursue a policy of mixed economy and to create stable conditions for vigorous growth of business and industry. However, to obtain external assistance the government dropped its campaign program and "accepted the entire set of IMF conditionality terms and literally handed over the economy to be subjected to them.

The story goes that the IMF team was engaged in a dialogue with a team of Uganda 'negotiators' from the Ministries of Finance, Planning, Education and the Bank of Uganda.  When the Uganda team questioned some of the IMF assumptions and conditionalities, the IMF team stormed out of the meeting and drove directly to President Obote, who promptly signed the agreement. The Ugandan 'negotiating' team only learnt of the signing from the news media" (H. B. Hansen and M. Twaddle 1991). However, the Bretton Woods Institutions (IMF and World Bank) have denied imposing conditions on borrowing countries.

In answering to IMF critics, former Managing Director, Michel Camdessus observed that "he was aware of the perception in some quarters that countries which sought urgently needed financial assistance from the IMF were forced to adopt programs which required cuts in social services and food subsidies on which the poor were dependent. "'This is false', said Mr Camdessus. "The decision on where spending cuts are made, and which sectors of the population will be most affected, are taken by governments, not by the IMF," he emphasized. "We work with governments to put together programs which correct the unsustainable imbalances in the economy."

The IMF chief acknowledged that 'too often in recent years it is the poor who have carried the heaviest burden of economic adjustment. Mr Camdessus also acknowledged the political pressures governments are placed in during times of economic crisis, and how sometimes it might be easier for some to make ambiguous remarks which could deflect responsibility for tough economic decisions"(Africa Recovery December 1987). Be that as it may, the Uganda government and IMF entered into a series of agreements that concentrated, among other things, on export sectors and exchange rate adjustment which led to a sharp devaluation of the Uganda Shilling from 8 shillings to the dollar to 1,470 to the dollar in February 1981.

The auction program not only benefitted the rich but was underfunded. It was abandoned in 1984. "Uganda government ran into problems with the IMF over the sharp rise in public spending and the government's worries over the plummeting exchange rate. It was not able to renegotiate a new facility when the one of September 1984 expired with SDR [Special Drawing Rights] 30m still undrawn. Obote ruled out a further standby facility because he would have to comply with unpopular economic measures in the run up to the impending elections" (New African Year Book 1987-88).

Reasoning that the government had violated human rights which had become an integral part of the Washington Consensus doctrine, the World Bank also cut off aid at a time of drought, intensified guerrilla activity, a shortage of trucks to carry coffee to Mombasa because Kenya had diverted its fleet to carry maize instead. In these circumstances popular dissent spread to all sectors of the population including the military, resulting in a bloodless coup of May 1985.

When [President Yoweri] Museveni and his National Resistance Movement (NRM) government came to power in 1986, he was aware of the limitations of structural adjustment and avoided it during the first year and half. He tried to mobilize resources bypassing the IMF and World Bank. However, he was advised that without approaching the IMF for clearance first, no major donor would help Uganda. Ipso facto, in November 1986, Museveni dropped the Minister of Finance and Governor of the Central Bank who apparently resisted the "shock therapy" or extreme version of structural adjustment for fear it might trigger political and social revolt. The ten-point programme was dropped and replaced with the Washington Consensus.

Subsequently, a three-man team from the IMF arrived in Kampala and began negotiations to resuscitate the economy and arrange to repay external debt of $1.5 billion (New African Year Book 1987-88).  The government then focused on diversification of exports to earn more foreign exchange, reducing food availability in the domestic market, thereby rising prices beyond the means of many households; devaluation of Uganda Shilling to make Uganda exports competitive in external markets that rendered imports very expensive, controlling inflation by reducing money in circulation that increased interest rate to levels that many Ugandans could not afford; privatizing public enterprises that resulted in retrenchment of workers; introducing labour flexibility that allowed employers to hire and fire at will and pay low wages; balancing the budget thereby ending or drastically reducing subsidies on social sectors especially education and health care as well as agriculture that directly sustains some 90 percent of Uganda's population.

It was also emphasized that economic growth and laissez faire policies would be the engine of growth and the benefits would be distributed through a trickle down mechanism. The role of the state was significantly reduced. Consequently investments in infrastructure such as roads and affordable energy were neglected.  The design and implementation of structural adjustment program was handed over to the Bretton Woods Institutions while Uganda had qualified and experienced people who Museveni advised to stay abroad and earn foreign exchange as their contribution to national recovery (The Courier 1993).

Therefore the reason given for turning Uganda economy over to foreign advisers was not correct as presented by a senior government official. "When the NRM came to power in 1986, it was faced with the momentous task of rehabilitating and developing a shattered economy, and raising the standard of living of the population after a decade of continuous civil strife and insecurity. … Faced with these acute problems and limited domestic capacity to respond effectively to them, in 1987 the government sought the assistance of the World Bank and IMF in designing and implementing an economic recovery program" (P. Langseth et al., 1995).

This government invitation was followed by a plethora of a wide range of advisers from all over including "aid missions from rich northern governments, big NGOs like World Vision and Oxfam, development professors from the famous universities, not to mention the UN agencies and Bretton Woods sisters. Each visitor brought a flagon of his own potion: Oxfam wanted to turn Uganda into a show case for debt relief; the World Bank pressed privatization; the United Nations Development Program sponsored an experiment to decentralize government. Pretty soon, everybody's potion was mixing with everybody else's and Uganda became a blend of all the fashionable ideas about development. Of course, this still made it more fashionable.

If there is one thing that the development experts love, it is a success that reflects their own brilliant advice" (Sebastian Mallaby 2004). This mixing of ideas did not help Ugandans. Economic growth didn't trickle to the people. Former UNDP Administrator, James Gustave Speth observed "Uganda is a leading example of an African country that is doing many of the right economic things to lift its people out of poverty. It has posted growth rates averaging over 6% a year for a decade. Yet two-thirds of the population remain in absolute poverty, and per capita income is only now approaching the level it had attained in 1970" (Proceedings of the Development Cooperation Seminar 1998 November 1999).

 According to the 2010 Human Development Report the number of Ugandans below the income poverty line of $1.25 a day stood at 51.5 for the period 2000-2008 (HDR 2010). The distribution of economic growth benefits has disproportionately gone to those already well off, thus inequality is a major challenge which was recognized early in NRM regime when it was observed that "There is a widespread feeling that only a few people have benefited from the prosperity brought by the NRM rule and that the priority should be to open up the gates before the majority breaks in" (South February 1991).

Sadly, no corrective measures were introduced and income inequality is the rule rather than the exception in Uganda society. Other human indicators are very disappointing. Instead of declining, maternal mortality rate increased from 527 in 1995 to 920 per 100,000 live births in 2005. Uganda loses more than 6000 mothers every year, meaning that 16 mothers die every day in large part due to lack of quality maternal care (African Peer Review Mechanism 2009).

The United Nations team in Uganda showed that economic growth which bypassed many Ugandans did not benefit children and mothers in particular. Consequently, between 1995 and 2000 for example when economic growth was over 7 percent reaching the peak of 10 percent in 1994/95 infant mortality increased from 81 to 88 deaths per 1000 live births. Under-five mortality increased from 147 to 152 deaths per 1000 live births, indicating that poverty and its offshoots of nutrition insecurity, low level of education and overall poor hygiene are still problematic (Uganda HDR 1996).

The desire to increase traditional (cotton, coffee, tea and tobacco) and non-traditional exports (maize, beans, sim sim, meat and timber etc.) have damaged the environment through clearing large swathes of vegetation including wetlands, impacting adversely on hydrological and thermal  regimes leading to frequent, long and intense droughts and floods. It has been estimated that if drastic measures are not taken immediately, 80 percent of Uganda could turn into a desert within 100 years which is a short time by historical standards. Overfishing has also been extensive, reducing supplies in the domestic market and pushing prices beyond the means of many families.

Having failed to deliver expected results, the government reluctantly admitted that things went wrong and abandoned structural adjustment in 2009 and launched a Five-Year National Development Plan which has not been implemented as reported by the Prime Minister in large part because NRM still clings to WC macroeconomic elements such as keeping inflation low around 5 per cent per annum presumably as advised by the IMF. Consequently interest rates have remained high making it difficult for small and medium enterprises to borrow, invest and create the badly needed jobs and expand national income.

Continued export of raw materials has kept prices down against rising prices of imports and overfishing for export purposes has reduced fish supply in the domestic market depriving many households of a source of protein, bearing in mind that the colonial administration developed fisheries (wild harvesting and fish farming) specifically to provide affordable source of protein to low income families.  What Uganda needs to do as the international community embarks on post-2015 development agenda covering the period 2016 through 2030 is to embark on public-private partnership in a symbiotic relationship according to the comparative advantage of each.

Given that 84 per cent of Ugandans still live in rural areas, agriculture and rural development should receive top priority through supporting artisans and small holder farmers who when adequately supported are more productive , more efficient, create more jobs, are more environmentally and socially friendly than large scale farmers. Infrastructure especially roads and accessible and affordable energy should be provided as well as institutions such as cooperatives. Agro-processing should be supported to add value. Reduction of pre-and post-harvest food losses should receive priority attention to make more food available without damaging the environment through extensive agriculture.

Quality education and healthcare in addition to proper nutrition including school feeding programs should receive commensurate support. Stolen money should be returned as well as a reversal in brain drain. These policy changes must be accompanied by democracy, good governance, rule of law and observance of human rights and fundamental freedoms. Without peace, there is no development and without development there is no peace and with neither there is no respect for human rights. The three go together and must be implemented simultaneously, not sequentially.

This paradigm will require a new crop of leaders that are patriotic with an impeccable record, expertise and experience and will put national ahead of personal interests so that no one is left behind in the process of rapid, sustained, equitable and sustainable growth and development.  As early as 1990, President Museveni understood the importance of government intervention in the economy when he said: "Deliberate government intervention [is necessary] to ensure overall sectoral and enterprise planning. It is an error if we simply leave the emergence of new industries to just market forces. There is need for planning. Planning can work hand in hand with market forces if properly mixed"(Address to OAU Summit 1990). Unfortunately, for Museveni, it was easier said than done.

Prof Eric Kashambuzi is an International Consultant on Development Issues. He lives with his family in New York, USA.             

 

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