Industrial Policy for Economic Transformation in Uganda Industrial Policy for Economic Transformation in Uganda June 2020 List of Tables
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Industrial Policy for June 2020 Economic Transformation in Uganda Authors Key Inputs Max Walter Ester Kovandova, Veronica Masubo, Tanushree Sahai, Francesca Guadagno, Juliane Bing, Badru Bukenya, Amir Lebdioui Drake Rukundo Gatsby Africa oversight & detailed review Review Ryan Bourque, James Foster Anne-Mette Kjaer, Raji Rajan KAS oversight and review Logistics Verena Kasirye, Mathias Kamp, Henry Muyanja, Anna Reismann Trailblazer Logistics Solutions Ltd. Project management support Layout and design Tanushree Sahai Tom Parkin Industrial Policy for Economic Transformation in Uganda Industrial Policy for Economic Transformation in Uganda June 2020 List of Tables Table 1 Data Sources 25 Table 2 Industrial Policy Targeting Approaches 54 Table 3 Industrial Policy Intervention Areas 62 Table 4 An Overview of the Industrial Policy Toolbox 64 Table 5 Phases of economic policy in post-colonial Uganda 71 Table 6 Government Policies on Industrialisation and Sector Priorities 104 Table 7 Mapping of current (and recent) industrial policy instruments employed in Uganda 111 Table 8 Three potential pocket of e!ciency for industrial policy 120 Table 9 Proposed Principles for Industrial Policy Targeting 126 Table 10 Illustrative Potential Target Activities 128 Table 11 Summary of recommendations 131 Table 12 Focus support and protection exclusively on priority industrial sectors and activities 133 Table 13 Providing deeper support to priority industrial sectors and activities 134 Table 14 Coupling industrial policy support with discipline 136 Table 15 Taking a more regional approach to industrial development 138 Table 16 Estimated effect of CET tariff changes on EAC partner states 144 Table 17 The EAC Sensitive Items list 145 Table 18 List of current State Owned Enterprises 151 List of Figures Figure 1 Analytic Framework 28 Figure 2 The political conditions for industrial policy success 40 Figure 3 Political settlements and growth in Uganda (1960 - 2015) 70 Figure 4 Uganda’s annual GDP per capita growth compared to East African Community 72 (EAC) neighbours, 1990-2018 Figure 5 Employment composition by sector 77 Figure 6 GDP composition by sector 77 Figure 7 Hirschman-Herfindahl Export Product Concentration Index, 1995 - 2018 78 Figure 8-10 Uganda’s Export Baskets (1997-2017) 79 Figure 11 Manufacturing exports (Lall classification) 80 Figure 12 Key government bodies involved in industrial policy with de jure and de facto 98 reporting lines Figure 13 Government spending on selected budget lines 108 List of Boxes Box 1 Some definitions of industrial policy 34 Box 2 Sugar in Mozambique - mutual interests, a pocket of e!ciency, and learning 44 for productivity 4 Industrial Policy for Economic Transformation in Uganda Contents Contents 5 Executive Summary 7 Abbreviations 18 Introduction 22 Objectives 24 Methodology 25 Structure 26 Analytical Framework 27 Economic Transformation 30 Industrial Policy 33 The Political Conditions for E!ective Industrial Policy 38 The Delivery of Industrial Policy 46 Industrial Policy Targeting 51 Industrial Policy Instruments 56 Uganda: A Brief History of Political Settlements, Industrial Policy and Economic Transformation 67 Uganda: The Present Picture 85 The Political Conditions for E!ective Industrial Policy 88 The Delivery of Industrial Policy 97 Uganda’s Current Industrial Policy Targeting Approaches 102 Uganda’s Current Use of Industrial Policy Instruments 106 Uganda: Future Pathways and Recommendations 113 Transformation Pathways 116 Industrial Policy Delivery 119 Industrial Policy Targeting 124 Industrial Policy Instruments 130 Conclusion 142 Annex 1: Detailed Mapping of Current Industrial Policy Instruments 144 Bibliography 158 Industrial Policy for Economic Transformation in Uganda 5 Photo credit: Ed Ram 6 Industrial Policy for Economic Transformation in Uganda Executive Summary E!ective industrial policy has been at the core of virtually every economic transformation success story around the world. After three decades of neoliberal economic management, and faced with stalled transformation, the Government of Uganda (GoU) now demonstrates a renewed interest and confidence in proactive industrial policy. While its e!orts to date have lacked focus and depth, there is now a clear sense of reflection on the next phase of industrialisation strategies: a National Industrial Policy has been drafted, and an Industrialisation Masterplan commissioned. The prospect of industrial policy success hangs in the balance: it can kickstart the deeper transformation so sorely needed to provide decent jobs and incomes to Uganda’s bulging youth population, but can just as easily become an extractive tool for patronage politics that stifles economic progress. This in-depth study aims to help shape the next phase of industrial policy in Uganda by injecting rigorous analysis and fresh ideas into the discourse. It brings together valuable lessons from Uganda’s own past and from the rich global literature on the politics, delivery, and content of industrial policy. Industrial Policy for Economic Transformation in Uganda 7 Executive Summary Analytic Framework notion of market failure. This is the idea that, if left alone, competitive markets will not yield the Economic transformation - the movement of labour best result for society. The most important market and other resources from low- to high-productivity failures that would justify government intervention economic activities – is necessary for sustained arise because of the presence of: i) economies of growth in output, decent jobs, incomes, and social scale, ii) externalities, or iii) market imperfections. development. Economic transformation relies Beyond fixing market failures, industrial policy on the acquisition of new productive capabilities can actively provide a vision that helps markets in higher value-added economic activities. shift resources into high-value-added activities in Traditionally, there have been two phases of the long-run, and foster firm- and system-level structural change driving across-sector economic capability development. While not all efforts of transformation: from agriculture to manufacturing industrial policy have been successful, the evidence and then to services. Today, certain services as well suggests that under the right circumstances, it has as high-value agricultural products have become been instrumental to economic transformation key drivers of economic transformation even for episodes. early-stage developing countries. Recent empirical evidence demonstrates that manufacturing is still The success or failure of industrial policy is influenced a key engine for economic transformation in both by a range of factors, the most profound of which is developing and developed economies. Ultimately, the political economy. The political forces shaping what matters for economic transformation is industrial policy outcomes in a given country are moving towards higher-value-added activities with driven by its underlying political settlement - the spill-overs and linkages that are able to absorb a balance of power within and beyond the ruling large portion of an economy’s productive resources, coalition. Industrial policy has the best chance of especially labour. success when cohesive coalitions and conducive power dynamics exist between the political elite, Industrial policy is broadly understood to refer to a the state bureaucracy, and the capitalists. range of government interventions aimed at altering productive structures toward higher-productivity Second, industrial policy e!ectiveness is dependent sectors and activities by changing the incentives, on the ability to galvanise and organise key constraints, and resources available to economic interests around a shared transformation agenda. actors. There are many well-documented cases of In successful industrialisers, this has generally been industrial policy success and failure, but virtually no achieved through a powerful central coordination cases of economic transformation success without body that is technically and financially empowered effective industrial policy. Success cases exist on and politically insulated from particularistic every continent, and many governments of the most interests. Effective sector development and advanced economies are still employing industrial specialised agencies have also played a key role in policy in order to maintain their competitiveness. many cases. There are also compelling theoretical arguments for industrial policy, particularly based on the 8 Industrial Policy for Economic Transformation in Uganda Third, it is driven by the choice of economic sectors, From 1986 to the mid 2000s, the National Resistance actors, and activities to be promoted by industrial Movement’s (NRM) largely stable ruling coalition policy. Successful industrialisers have tended to was able to usher in a consolidation of national concentrate scarce resources on a narrow set of security together with macroeconomic stability. target industrial sectors or activities. A growing This unlocked Uganda’s first episode of sustained literature proposes various methods for evidence- high GDP growth, which was coupled with promising based sector- or activity-selection for industrial signs of early economic transformation, including policy. strong export growth and diversification. This growth was driven by post-conflict reconstruction, large Finally, industrial policy outcomes are shaped by the donor funding inflows, investment by previously choice (and thus suitability) of the policy instrument exiled