Policy Paper    19th Jan, 2018

Two Decades of Growth with Limited Job Creation.

Uganda’s economy has performed impressively over the past two and half decades thanks to the stabilisation policies in the 1990s that restored macroeconomic stability and increased investor confidence in the economy. Despite this remarkable performance however, there are increasing concerns about unemployment and underemployment that have, paradoxically, become a defining feature of Uganda’s economy.

by Michael Mugisha

Two Decades of Growth with Limited Job Creation

What Explains Uganda's Economic Growth Paradox?

Uganda’s economy has performed impressively over the past two and half decades thanks to the stabilisation policies in the 1990s that restored macroeconomic stability and increased investor confidence in the economy. Economic growth expanded rapidly averaging at 6 percent for nearly two decades. This growth in fact enormously contributed to a reduction in poverty levels from as high as 56 percent in the mid 1990s to below 20 percent in 2013. Despite this remarkable performance however, there are increasing concerns about unemployment and underemployment that have, paradoxically, become a defining feature of Uganda’s economy. Paradoxical because the economy has not stopped expanding—at least according to economic pundits—and yet underemployment and unemployment are on the increase. The concern for unemployment and underemployment is informed by a number of reasons.

First and most obvious, unemployment affects social economic welfare because of its exclusionary effect on access to social services. Second, it makes the transition of young people to adulthood highly fraught and subsequently raises the threat of social instability due to high crime rates. Third, high levels of unemployment weaken the proclivity of private investment in human capital because the expected returns from further investment are discounted significantly. This could further weaken the entrepreneurial and innovative capacity of the economy and further depress job creation. Fourth and most importantly, high levels of unemployment and underemployment are a threat to our democracy. Following Joseph Stiglitz’s argument, powerfully articulated in his seminal publication The Price of Inequality, unemployment increases the spectre of inequality which weakens individual as well as collective capabilities, an essential ingredient in a properly functioning democracy.

The writing of this paper and the interrogation of the structural explanation of Uganda’s unemployment and underemployment is pursued in the spirit of the above reasons. The main question the paper seeks to examine is: why has unemployment and underemployment remained a pervasive feature of Uganda’s economy despite impressive sustained economic growth rates over the past two and half decades? This question is important mainly because classical economic literature advances the argument that a growing economy should be in position to generate employment. Seen from this perspective, why then has Uganda’s economy not generated the required level of employment to meet the job demand of her population?

Some have argued that the level of underemployment and unemployment is characteristic of any country at Uganda’s level of development. In other words, it simply reflects the phase of economic transition that Uganda is in at the moment. Others have argued instead that Uganda’s accelerating demographic transition has resulted into the growth of a labour force that far outstrips the capacity of the economy to meet its employment demands. While these arguments provide insight into understanding Uganda’s development challenge, they could be seriously flawed in their conclusions. The demographic argument is not particularly convincing mainly because there is often a considerable time lag between birth and entry into labour force—estimated at 15 years. Proper planning would therefore anticipate expected entrants into the labour force at any given time, and decisions could be made to turn around the economy in a way that meets future job demands at any given time.

This paper advances the argument that Uganda’s unemployment and underemployment problem is reflective of the dynamic complex political and economic processes of Uganda. Emerging from civil war in the late 1980s at a time when a neoliberal economic policy stance dominated the global development paradigm, Uganda’s economic reconstruction reform programme under the auspices of the World Bank and International Monetary Fund (IMF) placed emphasis on private sector market-oriented growth; never mind that much of what would have constituted private sector in Uganda had been annihilated, first by Idi Amin’s draconian policies that led to the expulsion of Asian businessmen and secondly, by the two decade civil war.

Although this policy stance contributed enormously to the stabilisation of the economy, subsequent rapid economic growth relied less on the vibrancy of the private sector (of which there was not much left), and more on the increase in mainly primary commodity prices driven largely by currency devaluation. In addition, the enormous deficit of social services in Uganda by the mid 1990s illuminated by the high levels of poverty motivated the creation of Poverty Eradication Action Plans (PEAP) with the view to increase the stock of social services mainly in provision of education, health, water and sanitation. In the subsequent years (from around 1995 to 2005), a lot of donor funding, which accounted for nearly 80 percent of government expenditure, was allocated towards increasing the stock of social services and less on investment in physical capital, a key ingredient in building a dynamic private sector-enabled, employment generating economy.

However in the early 2000s, donor pressure to embrace multiparty democratic dispensation threatened the survival of the NRM regime, and in a desperate attempt to stifle political competition and ultimately consolidate his regime, President Museveni unleashed the decentralisation programme, which in essence, was the proliferation of district creation. This programme, according to Green (2008), was an effective instrument for dispensing political patronage in order to weaken the ability of the opposition to wage an effective counteroffensive to the regime’s entrenchment in power. The resulting consequence of political patronage has been an increase in government consumption expenditure, which has further crowded out public investment in physical capital. But more deleteriously, the proliferation of political patronage through the explosive increase of districts has significantly fuelled corruption within the public sector and weakened its capacity to deliver public goods and services. The sheer malfeasance and incompetence of the public sector has compounded what the World Bank (2007) called ‘a syndrome of underinvesting state’, subsequently undermining the capacity of the economy to support a vibrant private sector. Firm growth has remained low mainly stifled by significantly high costs of doing business underpinned by pervasive infrastructure constraints. The low growth of firms has weakened the growth and diversification of different sectors of the economy, resulting in high levels of unemployment and underemployment. The changing demographics have simply compounded this status quo rather than accounted for it.

The rest of the paper is structured as follows: Section 2 reviews Uganda’s post war economic recovery macroeconomic policies and their impact on economic growth. This section also discusses the employment patterns as well as the job dynamics in Uganda. Section 3 examines the paradox of Uganda’s rapid economic growth rate and high unemployment and underemployment, while Section 4 explores what non-state actors can do to raise the importance of prioritising employment issues in national discussions. The last section concludes the paper.

Read the full paper here

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