Recently, a financial crisis has sent shock waves across the globe especially amongst the rich world from the United States to United Kingdom and the rest of Continental Europe.
The nature of the crisis is extremely incomprehensible even to the experts. It begun with the busting of the housing bubble in the U.S. that led to large losses for assets backed mortgage payments.
The resulting losses have left many financial institutions around the rich world with too much debt and too little cash to provide the credit needed by companies, private enterprises and individual consumers.
Banks are short of cash (liquidity) to pay for their resulting bad debts as well as to lend to each other and their clients.
There is wide spread panic that the global financial system may collapse and it seems to only be getting worse day by day.
Will this crisis spread to reach poor nations like Uganda and hurt ordinary Ugandans?
Yes, most probable. There are seven channels through which this crisis could spread to hit Ugandan economy and hence an ordinary Ugandan:
First, Uganda has been earning a lot of foreign exchange in form of remittances from Ugandans working abroad including the famous “Nkuba Kyeyos”.
These earnings reached a record level of USD $ 1.4 billion in 2007/08 financial year, making remittances the major source of foreign exchange for the government, private investment capital and macroeconomic stability instrument in Uganda.
Remittances also have been sole source of survival for some families, from school fees, to supporting household food and medical expenses.
Steady flow of this cash from Ugandans abroad has also supported the property boom, from land to housing and construction industry in Uganda which is at its peak now.
Much of this money comes from countries that are currently experiencing the financial meltdown i.e. U.S., UK, and continental Europe. Companies struggling to survive in these countries are likely cut jobs to reduce their costs, and others are collapsing and losing business.
In such circumstances it’s the immigrant workers that get affected first, and this will lead to reduced cash inflow in Uganda in form of remittances.
Reduced foreign exchange inflows will hurt government on macroeconomic stability, reduced private investment will lead to slow down in the property boom and families that depended on remittances from their kin abroad for incomes will be hurt, if this crisis turns into a global economic recession.
Second, Uganda’s exports will be hurt. Uganda is a primary commodities exporter i.e. coffee, tea, fish, flowers. Whenever, there is an economic slow down-recession, commodity prices are the first to Plunge. Recent oil prices are an example.
Depressed commodity prices together with reduced global demand because of reduced cash for rich consumer’s pockets will squarely be felt by the ordinary Ugandans who are directly participating in producing these commodities for exports through their reduced incomes.
Thirdly, like in the 1930s when the world entered into an economic recession, rich nations responded by shutting their markets from other nations exports-protectionism will rise. Triggered by industrial activity slow down, loss of jobs and massive unemployment, protectionism against Uganda’s exports could lead to reduced foreign exchange earnings, reduced household incomes depending on these exports.
Fourthly, reduced aid to support government budget, out of Ugshs: 6.1429 trillion budgeted in the current financial year, Ugshs: 1.8786 trillion is external money, probably in form of grants, loans or foreign aid. This is 30 percent budget support.
A recession as a result of financial crisis could trigger disruptions in the aid flows that can severely hurt government development budget and scale down the poverty eradication programmes undermining the progress to achieve the UN millennium development goals (MDGs) by 2015.
Also a probable recession will hurt NGOs budgets working in service delivery and development work. Because these NGOs usually depend on charity foundations in the north which depend on stock markets to raise their finances, agencies like World Food Programme which specialises in delivery of food aid to people in displaced camps could see their budgets shrink and operations hurt severely.
Firth, tourism, with the likely holiday makers in Europe, U.S. cash trapped, hotels and travel agencies may see fall in bookings and cash inflows, and likely will cut their costs by shedding jobs.
With fall in tourist arrivals, there will be fall in foreign exchange earnings and fall in activity of travel agencies and hotels leading to fall in jobs and family incomes.
Sixth, foreign investment in Uganda is also likely to slow down and thus slow down economic activity.
With commodity prices plunging, foreign extractive industry investment faces uncertain future if the recession continues, that will affect the viability and feasibility of certain companies investing in Uganda in short term, which could lead to loss of job creation opportunities with this missed investments.
Seventh, reduced cash inflows of any form will gravitate the problems families and households are already experiencing from high food and energy prices.
Household budgets have expanded of recent because of high food and energy prices, and with liquidity squeeze will make this worse for these families.
Overall, despite the rapid economic growth Uganda has achieved in the last years, it’s still vulnerable to external shocks like the current global financial crisis.
The above are still very serious potential avenues in which this crisis can hurt Ugandan economy and ordinary Ugandans in particular. The government and policy makers in Kampala should stay on the watch rather than dismissing the crisis!
Friday, October 31, 2008
Wednesday, October 15, 2008
Economic growth is more than cash in people`s Pockets!!
I read with interest Dr. Augustus Nuwagaba’s opinion titled “Why Economic Growth Is Not Felt In People’s Pockets” which was published in the New Vision of September 15. Nuwagaba gave an inaccurate analysis.
First, he wrongly characterises economic growth as construction of roads, buildings, airports, and other public facilities! What he characterises as economic growth is physical infrastructure development, which is only an indirect productive capital that facilitates the production of goods and services in a country.
Economic growth is the increase in a country’s output of goods and services in a given period. The total value (in dollars or shillings) of these goods and services is called gross domestic product (GDP). It constitutes national income over that period and includes what everyone in the country earned including, the two kilogramme of cassava per household dried by women along Iganga-Tirinyi-Mbale road that Nuwagaba mentioned.
Secondly, Nuwagaba failed to link economic growth and development. The UNDP human development report of 1990 defined “human development” as a process of enlarging peoples choices and opportunities — being educated, enabling individuals to develop their full potential and lead productive and creative lives, having access and command of resources to live decent, healthy and longer lives.
Development reflects improvements in welfare and expansion of choices and opportunities. So why has Uganda’s 8.9% economic growth rate not translated into cash in people’s pockets? This question can be misleading!
The reported growth rates often reflect both monetary and non-monetary GDP growth. When women along Iganga-Tirinyi-Mbale road produce cassava and feed their families (many households in Uganda are net food producers and rare goats, chicken and pigs), this enhances welfare more than cash in the pockets.
producing food for family consumption is the non-monetary GDP. If each household sells the surplus cassava and receives cash, this household income is reflected in the total national income as monetary GDP. So an economic growth rate like 8.9% of this financial year reflects goods and services that were produced and consumed at home to produce family welfare and those goods that went to the market to be exchanged for cash into the pockets.
So apart from what is felt in the people’s pockets, can we find other indicators of economic growth in Uganda? Yes, in the last 10 years, primary health care has improved while illiteracy rates, infant mortality rates and maternal mortality rates have gone down. More Ugandans go to school, more Ugandans can read and write, and an average Ugandan owns more now and lives longer than he did 10-years-ago.
Uganda is one of the countries in Sub Saharan Africa that has gained seven years of life expectancy (at 50.4 now). These are changes that have occurred because of sustained rapid economic growth that broadens people’s choices than cash in the pocket.
Until recently (2005), Uganda was one of the Sub Saharan countries on the path likely to attain the UN Millennium Development Goals (MDGs) by 2015, but the recent global economic changes and probably changes in Uganda’s priorities that have derailed it from this path. So it is not correct to focus on economic growth analysis in terms of only income-poverty aspect.
There are reasons why Uganda’s high economic growth rate may not translate into accelerated poverty reduction and economic inclusiveness. For example, Uganda has one of the highest population growth rates in the world (3.24% annually) and the highest proportion of the young in its population (49.4 % under the age of 14).
These statistics have a negative impact on the income of individuals even if the economy is growing at impressive levels of above 8.9%. Furthermore, productivity in the agricultural sector, which is the largest employer, has lagged behind the high population growth rate. This brings about low incomes in the sector and employment opportunities are not being generated quickly enough to meet the growing demand of non-agricultural work by graduating Ugandans.
Uganda’s rate of growth has been largely driven by concentrated enclave of exports especially coffee, fish, tea, limited manufacturing and construction, transport and communications. These sectors have few linkages with the informal economy that defines an average Ugandan.
This leads to income inequality that is hindering poverty reduction in Uganda, as Nuwagaba rightly observed.
How can income poverty be reduced? Through the increased rate of economic growth, and increasing the share that goes to the poor. The more of this income increment is captured by the majority poor, the more efficient the country will be in converting growth into poverty reduction.
The Government must prioritise creation of an enabling environment for small scale agriculture, micro enterprises and informal sector — the sectors that the poor depend on for their livelihood. This is possible if the steps being taken under “Prosperity-for-All” are effectively implemented and the Government continues focus on infrastructure development, especially transport and energy — contrary to Nuwagaba’s view of “public goods model”.
The writer is a Trade and Development Specialist
based in Geneva
First, he wrongly characterises economic growth as construction of roads, buildings, airports, and other public facilities! What he characterises as economic growth is physical infrastructure development, which is only an indirect productive capital that facilitates the production of goods and services in a country.
Economic growth is the increase in a country’s output of goods and services in a given period. The total value (in dollars or shillings) of these goods and services is called gross domestic product (GDP). It constitutes national income over that period and includes what everyone in the country earned including, the two kilogramme of cassava per household dried by women along Iganga-Tirinyi-Mbale road that Nuwagaba mentioned.
Secondly, Nuwagaba failed to link economic growth and development. The UNDP human development report of 1990 defined “human development” as a process of enlarging peoples choices and opportunities — being educated, enabling individuals to develop their full potential and lead productive and creative lives, having access and command of resources to live decent, healthy and longer lives.
Development reflects improvements in welfare and expansion of choices and opportunities. So why has Uganda’s 8.9% economic growth rate not translated into cash in people’s pockets? This question can be misleading!
The reported growth rates often reflect both monetary and non-monetary GDP growth. When women along Iganga-Tirinyi-Mbale road produce cassava and feed their families (many households in Uganda are net food producers and rare goats, chicken and pigs), this enhances welfare more than cash in the pockets.
producing food for family consumption is the non-monetary GDP. If each household sells the surplus cassava and receives cash, this household income is reflected in the total national income as monetary GDP. So an economic growth rate like 8.9% of this financial year reflects goods and services that were produced and consumed at home to produce family welfare and those goods that went to the market to be exchanged for cash into the pockets.
So apart from what is felt in the people’s pockets, can we find other indicators of economic growth in Uganda? Yes, in the last 10 years, primary health care has improved while illiteracy rates, infant mortality rates and maternal mortality rates have gone down. More Ugandans go to school, more Ugandans can read and write, and an average Ugandan owns more now and lives longer than he did 10-years-ago.
Uganda is one of the countries in Sub Saharan Africa that has gained seven years of life expectancy (at 50.4 now). These are changes that have occurred because of sustained rapid economic growth that broadens people’s choices than cash in the pocket.
Until recently (2005), Uganda was one of the Sub Saharan countries on the path likely to attain the UN Millennium Development Goals (MDGs) by 2015, but the recent global economic changes and probably changes in Uganda’s priorities that have derailed it from this path. So it is not correct to focus on economic growth analysis in terms of only income-poverty aspect.
There are reasons why Uganda’s high economic growth rate may not translate into accelerated poverty reduction and economic inclusiveness. For example, Uganda has one of the highest population growth rates in the world (3.24% annually) and the highest proportion of the young in its population (49.4 % under the age of 14).
These statistics have a negative impact on the income of individuals even if the economy is growing at impressive levels of above 8.9%. Furthermore, productivity in the agricultural sector, which is the largest employer, has lagged behind the high population growth rate. This brings about low incomes in the sector and employment opportunities are not being generated quickly enough to meet the growing demand of non-agricultural work by graduating Ugandans.
Uganda’s rate of growth has been largely driven by concentrated enclave of exports especially coffee, fish, tea, limited manufacturing and construction, transport and communications. These sectors have few linkages with the informal economy that defines an average Ugandan.
This leads to income inequality that is hindering poverty reduction in Uganda, as Nuwagaba rightly observed.
How can income poverty be reduced? Through the increased rate of economic growth, and increasing the share that goes to the poor. The more of this income increment is captured by the majority poor, the more efficient the country will be in converting growth into poverty reduction.
The Government must prioritise creation of an enabling environment for small scale agriculture, micro enterprises and informal sector — the sectors that the poor depend on for their livelihood. This is possible if the steps being taken under “Prosperity-for-All” are effectively implemented and the Government continues focus on infrastructure development, especially transport and energy — contrary to Nuwagaba’s view of “public goods model”.
The writer is a Trade and Development Specialist
based in Geneva
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