Uganda Economic Update JOBS : KEY TO PROSPERITY Uganda Economic Update SECOND EDITION AUGUST 2013 Jobs: Key to Prosperity 2ND EDITION i AUGUST 2013 Uganda Economic Update JOBS : KEY TO PROSPERITY © 2013 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. Photography: Ms Lorah Walusimbi Mulenga; and Dilstories, www.dilstories.com Cover design and interior navigational graphics: MEC Uganda, [email protected], www.mecuganda.com Typesetting, graphics, and page layout: MEC Uganda. Printed in Uganda by New Vision Printing and Publishing Company Ltd. Additional material relating to this report can be found on the World Bank Uganda website (www.worldbank.org/uganda). The material includes a documentary video and a number of blogs relating to issues in the report. 2ND EDITION ii AUGUST 2013 Uganda Economic Update JOBS : KEY TO PROSPERITY Table of Contents Foreword vii Acknowledgements viii Abbreviations And Acronyms ix Key Messages x Part 1: The State of Uganda’s Economy 1 1. Recent Economic Developments 1 1.1 Recovery: The receding impacts of shocks and stabilization measures 2 1.2 Infl ation down, but real interest rate still high 4 1.3 Fiscal Policy Adjustments: A necessary response 6 1.4 External balance improves, even as trade prices disfavor Uganda 11 2. Economic Outlook 14 2.1 Good growth prospects for FY14 and the medium term - but don’t take it for granted 14 2.2 Risks: External shocks, declining aid, poor weather and political will 20 2.3 For the jobs outlook, does it matter which parts of the economy grow? 22 Part 2: Jobs: Creating more productive employment opportunities for more of Uganda’s citizens 25 3. Jobs: connecting to prosperity 26 3.1 Why should we be concerned about jobs? 26 3.2 What jobs do Ugandans do? 29 3.2.1 The agricultural sector: Still the largest source of employment but at a cost of its productivity 31 3.2.2 Non-agriculture informal enterprise sector: The biggest source of employment in urban areas 33 3.2.3 The non-agricultural formal enterprise sector – small but growing 34 2ND EDITION iii AUGUST 2013 Uganda Economic Update JOBS : KEY TO PROSPERITY 4. What will be the Drivers of the Jobs Agenda in Uganda? 41 4.1 The demographic change: The vital need to improve human capital 41 4.2 The changing economy is driving changes to jobs in urban areas 44 4.3 Ongoing urbanization: Increasing demand for more jobs in urban areas 46 5. Uganda’s jobs agenda: How to create more productive jobs for a rapidly expanding labor force 48 5.1 A multi-dimensional strategy for creating productive jobs 48 5.2 Towards a priority set of action for faster job creation 58 Statistical Annexes 61 2ND EDITION iv AUGUST 2013 Uganda Economic Update JOBS : KEY TO PROSPERITY List of Boxes Box 1: Aid Disruption following Governance Scandals in Uganda 9 Box 2: Could Uganda’s debt revert to pre relief levels? 11 Box 3: Summary of assumptions for the medium term outlook 15 Box 4: The National Budget for FY14 Highlights 16 Box 5: Job Aspirations – Different Perspectives, Same Visions 26 Box 6: Shift Back into Agriculture not necessarily labor market deterioration 32 Box 7: Quality of education at foundation level needs to improve 43 Box 8: What would it take to improve Uganda’s Farms? 49 Box 9: What would it take for land to be used increasingly for high value activities over time? 57 Box 10: Improving Light Manufacturing - Lessons from Ethiopia’s Leather Industry 60 List of Tables Table 1: Central Government Operations: FY09 - FY13 10 List of Figures Figure 1: Construction and Services drive economic recovery 3 Figure 2: Uganda’s FY13 Growth: A recovery, but not as good as the neighbors 4 Figure 3: An easier monetary policy, but the banks aren’t passing on rate cuts to borrowers 5 Figure 4: Private sector credit: Construction, Trade and Personal Loans get the lion’s share as borrowers prefer dollars 5 Figure 5: Uganda’s domestic revenue collection: Not much change in FY13 7 Figure 6: Gaps between budget allocations and actual disbursements 8 Figure 7: Current account improves, but reversal of portfolio flows worsening the overall external position in FY13 13 Figure 8: Fiscal strategy focusing on key constraints 17 Figure 9: Services took off earlier, but the construction boom drove most of the recent structural transformation 23 2ND EDITION v AUGUST 2013 Uganda Economic Update JOBS : KEY TO PROSPERITY Figure 10: Sectors with high productivity not necessarily high employers: Uganda 2003-2010 24 Figure 11: Sources of jobs: Most Ugandans work in agriculture 29 Figure 12: Big differences in the jobs Ugandans do in Rural and Urban areas 30 Figure 13: Uganda’s Youth Taking a Proportionate Share of Jobs by 2009/10 30 Figure 14: Uganda’s Wage employment has grown rapidly across all sectors, 2005/06 - 2009/10 35 Figure 15: Uganda: Formal Firm Entry, Exit and Churning during the 2000s 36 Figure 16: Most of the work force is in micro firms, with large firms getting smaller during the 2000s 37 Figure 17: Smaller firms grew through the decade of 2000s, especially in traded goods 38 Figure 18: Structural transformation has not resulted in enhanced productivity per worker in the formal sector in Uganda 38 Figure 19: Low value services dominated non-household-based job growth during the 2000s 39 Figure 20: Formal Jobs are increasingly concentrating in urban areas 39 Figure 21: Uganda’s fast growing workforce: Is it getting smarter fast enough? (2010 and 2030) 42 Figure 22: Agriculture will continue to be the largest source of jobs in the short to medium term, whether or not the sector becomes more productive 45 Figure 23: Urban Profile Versus Rural Profile 47 Annexes Statistical Annex 61 2ND EDITION vi AUGUST 2013 Uganda Economic Update JOBS : KEY TO PROSPERITY Foreword It is a pleasure to introduce the second edition of the Uganda Economic Update series. The series is part of our effort to engage a broad audience in a discussion of Uganda’s economic developments. Each edition of the series includes two parts: a general update on the economy of Uganda, and a more detailed discussion of a specific issue of critical importance to the development of Uganda. The present edition discusses the agenda of Jobs, around the challenge of creating productive employment opportunities for more of Uganda’s citizens. This second edition comes at a time when Uganda’s economy is recovering from the slump it suffered in FY12, when it recorded a GDP growth of 3.4 percent. If the renewed macroeconomic stability is sustained and investments to address binding constraints to growth yield dividends, the economy is expected to gradually revert to earlier growth rates of around 7 percent. This growth outlook also reflects expected benefits from oil-related investments. The most important challenge lies on how the country exits aid dependence without falling into oil dependence. Key to this transition relates to prudent fiscal management, good governance, accelerating growth through a more diversified economic base that brings about more job opportunities. Over the past decades, Uganda’s impressive economic growth has generated employment opportunities in many sectors. However, these have been insufficient to absorb the fast growing and rapidly urbanizing labor force. A number of factors are at play here: • First, most firms are stuck in a sub-optimal equilibrium with low productivity. Combining this with rapidly growing labor supply, educated youth are increasingly finding it difficult to gain employment in areas for which they have been trained or that match their qualifications and expectations. • Second, the vast majority of Ugandans remains unskilled. As a consequence, they are unable to promote the growth of firms. • Third, the mismatch between the number of good jobs and the size of the labor force is likely to worsen as an increasingly large number of young Ugandans enter the workforce. Moreover, as the agricultural sector becomes more efficient and productive, the ability of this sector to absorb large numbers of workers will diminish. This will further accelerate urbanization. However, through appropriate policies, Uganda can build upon the successes of the past to address the challenge of creating more and better jobs. This second edition of the Uganda Economic Update series argues that the biggest challenge for policy makers relates to creating an enabling environment for farms and firms to thrive, grow, and create productive jobs.