Chapter 4. Economic Performance and Poverty Reduction

Overview

4.1 Uganda has staged an impressive economic recovery during the Museveni years. It has consistently registered one of the highest growth rates in Africa, aided by reconstruction of infrastructure and liberalisation of the economy. Overall, there has been a significant reduction of poverty. This chapter highlights the main features of this performance and assesses the depth and durability of the achievement.¹²

Macroeconomic Performance

4.2 When the National Resistance Movement (NRM) took power in 1986, the economy had collapsed with GDP 20 percent lower than its 1970 peak, high inflation rates, chronic budget deficits, an overvalued exchange rate, significantly lower export earnings and deteriorated infrastructure. Subsequent macroeconomic developments are summarised in Table 4.1.

Table 4.1: Macroeconomic Indicators 1987–2005

1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005
8.25	6.42	11.29	9.10	5.47	3.61	8.05	5.64	4.94	6.84	4.72
4.9	3.5	8.6	6.4	2.7	0.8	5.0	2.6	2.0	3.9	1.9
6.1	9.7	8.6	7.2	6.9	0.0	6.6	2.8	2.0	-0.3	7.8	3.3	8.2
11.2	11.7	11.2	11.8	13.3	12.9	12.9	13.7	13.8	15.2	14.8	14.5	14.2
19.2	19.3	17.2	16.6	17.2	16.3	17.9	26.7	21.6	24.4	24.9
15.9	15.4	14.6	14.7	15.8	15.8	16.6	17.0	18.7	19.1	19.1
7.5	8.6	10.1	10.5	11.3	10.6	11.6	11.3	10.8	12.2	12.1
-11.7	-10.7	-7.1	-6.1	-5.9	-5.7	-6.3	-15.4	-10.8	-12.3	-12.8
-3.3	-3.9	-2.6	-1.9	-1.4	-0.5	-1.3	-9.6	-3.0	-5.3	-5.8

Sources: World Bank Development Indicators Database and World Bank Africa Database 2005.

4.3 Positive GDP growth rates were maintained throughout the period, and Uganda has stood out as a rare strong performer during a period when the economic performance of most African countries has been dismal.¹³ However, it was not until 1992 that infla-tion was brought under control: since then it has remained in single digits. A series of policies to liberalise the economy were implemented, including the abolition of foreign exchange controls, freeing up of commodity markets, and reduction of trade barriers. Domestic revenue collection (in a land-locked economy with a weak revenue base) has strengthened. It was less than 5% of GDP in 1985, but the present level – 12% of GDP – is still low. Strong aid inflows have enabled public expenditure to run at double the level of domestic revenues, and have themselves boosted economic growth. The economy is still highly dependent on coffee exports, but with significant diversification into fish and other agricultural exports.

Poverty Reduction

4.4 Table 4.2 summarises trends in poverty reduction. Over the period for which poverty data are available, the proportion of Ugandans living below the national poverty line has fallen from 56% to 38% (though the latter figure is a rise of 4% between 1999/2000 and 2002/03). Economic growth (which has exceeded Uganda’s very high population growth rate), has been the main factor in reducing the number of people living below the income poverty line, while aid has supported the expansion of basic public services.

Table 4.2: Uganda’s Poverty and Inequality Trends 1992/93–2002/03

Source: World Bank, 2005 (PEAP 2004/05–2007/08).
Notes:

• (*) Excluding Kitgum, Gulu, Bundibugyo, Kasese and Pader. If these (except Pader) are included, poverty in 2002 will be 66% instead of 63% in northern Uganda and 39% at the national level rather than 38%.
• Despite a decrease in the percentage of people living below the national poverty line from 1992/93 to 2002/03, due to population growth, the number of people living below the national poverty line has risen over this period.

4.5 Table 4.3 shows the status of MDG targets. The Uganda Joint Assistance Strategy assesses Uganda’s prospects for achieving the MDGs as follows:

Uganda has made substantial progress towards achieving the MDGs, although more needs to be done if all are to be achieved.¹⁴ As can be seen from [Table 4.3], with continued good policies, Uganda appears likely to achieve one of the targets for MDG 1 (eradicate extreme poverty), MDG 3 (promote gender equality and empower women), MDG 6 (combat HIV/AIDS), MDG 7 (ensure environmental sustainability), and MDG 8 (develop a global partnership for development). Uganda may also be able to achieve MDG 2 (achieve universal primary education) with greater effort to encourage children to complete primary education. With adoption of improved policies, strengthened institutions, and additional funding, the country may be able to meet the target for hunger. However, progress towards MDG 4 (reduce child mortality) and MDG 5 (improve maternal health) is uncertain even with improvements in policies, institutions, and funding. (World Bank 2005a)

Table 4.3: Uganda’s MDG and PEAP Targets and Status 1990–2015

Sources: World Bank, 2005a (2004 PEAP, Demographic and Health Surveys, National Household Survey).
Notes: *PEAP Targets more ambitious than MDGs.

Assessment

4.6 The overall conclusion is that over the past two decades, Uganda has had considerable economic success, achieving a lively rate of economic growth in response to macroeconomic stabilisation and liberalisation. Government has improved the supply of basic social services and poverty has been reduced across much of the country.

4.7 Although impressive, the Ugandan “success story” is subject to certain caveats and there are a number of economic issues that will have to be addressed in the coming period:

• A good deal of the growth can be explained by the restoration of the pre-Amin levels of economic activity and by the direct impact of the flow of aid.
• Although there were significant reductions in poverty, these were regionally unbalanced, with improvements concentrated in the Centre and West of the country, and a much less impressive performance in the North and East.
• After 1997, GDP growth slowed and the terms of trade deteriorated (the effects of coffee prices on poverty remain strong). Inequality began to rise and poverty in the North increased. Agricultural growth during 2000-2003 was disappointing except in the livestock sector.
• Although Uganda is showing encouraging levels of private sector investment, it is not clear that the foundation has been laid for longer-term sustainable economic growth. Despite its successes, Uganda remains one of the world’s poorest countries.

4.8 Box 4.1 compares Uganda with Tanzania and Vietnam to raise some issues about the strength and sustainability of the growth path that Uganda has followed.

Box 4.1: Patterns of Development – Uganda, Tanzania and Vietnam A comparison between Uganda, Tanzania and Vietnam is of special interest, as the three countries began their reform process at around the same time (Tanzania moved towards structural adjustment over 1982-85, initiating a systematic reform programme in 1985; Vietnam initiated Doi Moi in 1985, quickening the pace of reform from 1989). Also they began with quite similar levels of per capita income, and similarly deep economic crises. Also they have received support from many of the same donors (including Danida). The economic performance of Uganda and Tanzania is essentially similar. Both have stabilised their macroeconomic environments, liberalised their international payments and trade regimes and achieved reasonable rates of growth. In both cases poverty programmes have been adopted which have met with donor approval (the PRSP in Tanzania and the PEAP in Uganda), and both have had some success in expanding basic education and other social services. Both countries are viewed as among the successes of structural adjustment in Africa. However, in both cases there has been a large and persistent dependence on aid to finance the budget and the large gap in the trade account, so that at least part of the observed growth performance is simply the result of aid flows. Tanzania has done somewhat better in recent years in relation to export growth, but mainly as the result of the rapid expansion of gold exports (in response to favourable – perhaps too favourable – incentives for foreign investment in mining). In neither country has there been any significant growth in the relative importance of manufacturing nor success in developing industrial exports. In both cases, there has been a lively development of the service sector and investment in buildings, partially sustained by the inflow of aid. In contrast, Vietnam has achieved a quite dramatic and sustained increase in exports, on a highly diversified base (mining, agriculture and fisheries and manufactured exports), which has underpinned a much more vigorous growth performance, resulting in an exemplary reduction in poverty. Perhaps what is worrying for an aid assessment is that in the Vietnamese case the role of aid has been relatively minor. Notably, the most dramatic changes in policy and the initiation of the export-led growth process happened during a period of very modest and declining levels of external assistance – 1980-1993. Even with the build-up in official assistance from 1994 onwards, aid dependence has remained modest, in striking contrast to Uganda and Tanzania. While aid has been useful (e.g. in supporting infrastructure development) there is little sense that the Vietnamese economy and growth process are dependent on aid flows. The difficult question, which is raised here but not answered, is whether this comparison suggests that there is an African model of excessive aid dependence, associated with the growth of an aid financed service sector, low rates of industrialisation and sluggish export performance. Source: Volume 3, Background Paper 1.

12) For a fuller analysis see Volume 3, Background Paper 1. Additional data are in Appendix D of the present volume.

13) See Commission for Africa, 2005, Chapter 7.

14) It is important to note, however, that Uganda’s long-term development objectives are set out in the PEAP and that the PEAP contains targets that are as ambitious as, and in certain areas (HIV/ AIDS), even more ambitious than the MDGs.