Forward With Growth Diagnostics Back to Industrial Policy? Reflections from Uganda CEM

1. Forward With Growth Diagnostics Back to Industrial Policy? Reflections from Uganda CEM Presented to: Economic Policy Growth BBL Series 26 March, 2008 Presented by: Dino Merotto AFTP2 World Bank The World Bank

2. The World Bank Reflections: Diagnostic Journey & Approach Some CEM Findings & Recommendations This Presentation … • Uganda’s Recent Growth Policy Debates • …What growth advice can the Bank offer a mature reformer? • ESW: Conclusions & Where Next to be Useful?

3. The World Bank Reflections: Diagnostics Journey, Approach This Presentation …

4. What’s Special About Uganda ? Landlocked - (and Rural) => Transport Matters… Demographics: -World’s highest dependency ratio - Most youthful population (53% under 15) - 2nd most rural in AFR 80% (econ informal) - 3rd fastest fertility rate in the world - workforce will double in 15 years – then? Approach … 1 - Specificity • Conflict Affected -New Markets? • - Sensitivity to unbalanced growth • Good Policies:- stable macro (more than 15 years) • - advanced structural reforms – where next?

5. Look at Micro Foundations: Firms and Farms Household Data- Social Indicators, INF access, micro firms, (UNHS, Census, NSDS) - Agric information, crop prices, credit Firm Data : -ICA, CODB - Business Register / Census (employment) - Business Inquiry (value added, costs) Approach … 2 – Consider Micro • Sector Data -Agric Market Surveys, productivity pilots • (Farms and Banks) - Banking surveillance data (assets, rates) • Spatial Data - Adds Geographical space to agents info • (GPS in firm data, farms) - Good to link INF assets to firms / farms

6. Look Back, Present, Forward, Compare, Map ! Look Back- Growth Accounting – Macro, Agriculture - Infrastructure Expenditures, Access Consider Present Growth diagnostic HRV - Great to organize, useful syndromes, prices - Look for / consider likely constraints Approach … 3 – Multi Diagnostic Look Forward - Growth paths => constraints not enough - MAMS CGE model - Dutch disease model (Bevan / Adam) Compare - Benchmarking to compensate for data gaps – for HRV have to look international Map it ! - Geography as presentational tool - INF assets & productivity, agglomeration

7. The World Bank Key Findings From CEM Diagnostics This Presentation …

8. Don’t Need A Fundamental Change … …Growth Has Been Strong World’s Fastest Growing Countries In The 1990s (Per Capita Income) The World Bank Page8 The World Bank

9. Don’t Need Fundamental Change… …Good Policies Have Helped Growth The World Bank Page9 The World Bank

10. 5-year moving average of GDP Growth and TFP growth (1960-2000) 10.00 10.00 5.00 5.00 0.00 -5.00 -10.00 0.00 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 1960 1962 1964 1966 1968 -15.00 % -20.00 -5.00 -25.00 -30.00 -10.00 -35.00 -40.00 -45.00 -15.00 TFP growth GDP growth Past Growth Accounting… …Mostly the “TFP” Residual The World Bank Page10 The World Bank

11. Past Growth Accounting… Human Capital Improvements Underway… The World Bank Page11 The World Bank

12. Education Levels In The Workforce ( ) 10-64 year olds 8,000 7,000 Some primary 6,000 No formal 5,000 Completed primary Thousands 4,000 Some secondary 3,000 Completed secondary 2,000 Post secondary 1,000 - 1992/93 1999/00 2002/03 Education….Levels are rising… Public Expenditure FY 2007 The World Bank Page12 The World Bank

13. But: … Returns To Education Rising Mostly For the Skilled… Quality Ed matters more than access Skills Gaps are emerging? The World Bank Page13 The World Bank

14. Is It High Cost Finance? Uganda’s Firms Complain That It Is (ICA) No access to ext. commercial borrowing, but gaining a Moody’s credit rating post MDRI, and heavily aided. • - no external finance crunch likely for years… • If the syndrome of bad domestic finance from a lack of savings was constraining private investment, we would expect… • - high interest lending rates (& on savings too) • - possibly due to interest rate crowding out • - a high lending to deposit ratio: with banks making use of savings with innovative lending. • If weak intermediation was the problem, we might expect to see banks with high costs and interest spreads, not making imaginative use of savings… and firms not expecting much from banks. Page14 The World Bank The World Bank

15. We looked at the financial sector for symptoms…macro analysis Private credit – though expanding - is a very low share of GDP, Gvt borrows heavily (for sterilization) and interest rates are high => So, you might think, Uganda must be an over-borrowing state… • But… TBill rate is uncorrelated with lending rates andlevels • => it’s not crowding out - lending rates stay in a high band even when TB rates fall, domestic PSBR is - in fact - negative due to aid. • There is also a low loan to deposit ratio • => So it’s not low savings, although savings are low… There are very high interest rate spreads (deposit rates are low…) • Banks hold a lot of Treasury Bills in their asset portfolios • And… excess cash assets seem to go offshore, not to Ug borrowers… The World Bank Page15 The World Bank

16. 35.0% 30.0% 25.0% 20.0% % 15.0% 10.0% 5.0% 0.0% 0 5 10 15 20 25 30 35 40 45 50 Uganda Government Securities Lending to foreign Banks When they’re not buying Treasury Bills, banks are lending to foreign banks… The World Bank Page16 The World Bank

17. So we looked more closely at complaining firms and farms for symptoms… High Costs Of Finance Was The Most Common Complaint In the ICA 2002/03 – so this led us to look more closely at firms’ borrowing Very few firms borrow to invest – only 14% of Inv is bank financed… they mostly use internal funds Credit constrained firms invest at same rates as bank borrowers…? • Only 2% of rural credit comes from banks – even many traders manage without bank lending … So are Ugandan Firms Credit Constrained in their investments? The World Bank Page17 The World Bank

18. Don’t Take Qualitative Survey Replies At Face Value… ICA, CODB Public Expenditure FY 2007 The World Bank Page18 The World Bank

19. Is a response valid if firm didn’t apply because they didn’t need credit? Page19 The World Bank

20. Banks Are Not Taking Risks With Small & Medium Enterprises? The World Bank Page20 The World Bank

21. 5-year average for growth of factors in Uganda 9.00 8.00 7.00 6.00 5.00 4.00 % 3.00 2.00 1.00 0.00 1960 1965 1970 1975 1980 1985 1990 1995 2000 -1.00 -2.00 Physical Cap Stock Growth Human Capital Growth Macro Stock-Take – From Growth Accounting… … Physical Capital Has Lagged Human Capital (Kasekende et al 2004) The World Bank

22. De-compose TFP…? Macro indicators of a + ve growth picture Macro indicators showing healthy signs: • Growth even though Terms of trade were against Uganda… • Changes in Uganda’s export mix have occurred • Labor movements across sectors • Changing composition of imports too… • Efficiency indicators for formal sector firms • Gradual (but slow) net migration to the cities The World Bank Page22 The World Bank

23. Don’t Need a Fundamental Change… …Growth Through Declining Terms of Trade The World Bank Page23 The World Bank

24. Growth Continued - Despite Terms of Trade – Slow down no cause for re-direction (and new stats) The World Bank Page24 The World Bank

25. Don’t Need Fundamental Change … ... New exports are emerging (BOP data) The World Bank

26. Share 1992/93 1999/00 2002/03 GDP (factor cost 100 100 100 ) Agriculture 48 41 39 Industry 12 18 18 Services 40 41 43 Labor force 100 100 100 Agriculture 82 80 69 Industry 5 4 7 Services 13 16 24 Labor Productivity & Labor Movements… … TFP from move out of Agric to Services (and possibly back… (05/06 findings) The World Bank Page26 The World Bank

27. Household-Based Enterprises by age Year Started: Number % Before 1980 108,003 6% 1980-1989 212,951 12% 1990-1995 292,505 17% 1996-1999 432,916 25% 2001-2003 665,685 39% Mostly Through Informal Service Enterprises ….which took off late 1990s. The World Bank Page27 The World Bank

28. Most Formal Firm Start-ups Are Small… The World Bank Page28 The World Bank

29. Most Formal Firm Start-ups Are Small… The World Bank Page29 The World Bank

30. Most New Formal Firms Are In Services… The World Bank Page30 The World Bank

31. Most Formal Firms Established During the Reform Period Are Small… The World Bank Page31 The World Bank

32. In Some Districts … Firms Get Bigger With Age… Public Expenditure FY 2007 The World Bank Page32 The World Bank

33. Agriculture story…farmers have been : • diversifying into higher return crops, • increasing yields, • selling more of their output in markets The World Bank Page33 The World Bank

34. 1987-2005 1983-1986 1987-1990 1991-2000 2001-2005 Agriculture 3.8 1.4 4.8 3.9 2.9 Growth Contributions – Absolute % Industrial crops 0.53 0.05 0.27 0.77 0.26 Food crops 2.41 1.32 3.62 2.30 1.69 Livestock 0.50 -0.22 0.50 0.48 0.53 Forestry 0.19 0.07 0.19 0.19 0.21 Fishing 0.22 0.28 0.21 0.22 0.21 Sub -sectoral shares in Growth (1=100%) Industrial crops 0.14 0.04 0.06 0.20 0.09 Food crops 0.63 0.92 0.76 0.59 0.58 Livestock 0.13 -0.15 0.11 0.12 0.18 Forestry 0.05 0.05 0.04 0.05 0.07 Fishing 0.06 0.19 0.04 0.06 0.07 Food Crops Remain Important … Sub-sector Contributions to Agricultural Growth The World Bank Page34 The World Bank

35. Uganda Poverty Trends 1992/93 - 2005/6 Don’t Need Fundamental Change … … Poverty Is Still Falling The World Bank

36. But ... Recent Agricultural Growth Is From Increased Yield NOT Price: Price Falls => Markets Needed? (Results confirmed in MAMS simulations…)

37. But … … Agriculture and Informal Business are absorbing the labor force, NOT the formal sector The World Bank

38. But … … Fastest Growing Population In the World The World Bank

39. Conclusions from Diagnostics: Policy reforms have largely worked. Growth has continued despite poor terms of trade, and new products are emerging, poverty has fallen. Uganda does not need a fundamental change in policies for growth. • But Uganda’s demography means growth needs to bring more jobs… (off-farm) & in towns Physical capital lagging and mostly structures => Suggests an Investment Agenda Needed The World Bank Page39 The World Bank

40. The World Bank • CEM Growth Recommendations… This Presentation …

41. It’s Time to Invest… In Infrastructure, In Cities, For Export • Jobs, Jobs, Jobs, Outside of agriculture … • – requires energy, cities The World Bank Page41 The World Bank

42. It’s Time to Invest… In Infrastructure, In Cities, For Export Workforce to Double In 15 years …. – with a growth dividend or dependency? The World Bank Page42 The World Bank

43. Evolution of Sectoral Shares of Gross Domestic Product 100% 90% Gas, Electricity, Services mining and 80% water quarrying 70% Construction 60% 50% Manufacturing 40% Agriculture 30% Slower Minimal 20% Transformation Transformation Rapid Transformation 10% 0% 1983/84 1985/86 1987/88 1989/90 1991/92 1993/94 1995/96 1997/98 1999/00 2001/02 2003/04 1981/82 Source: UBOS July 2005 data It’s Time to Invest… In Infrastructure, In Cities, For Export • Structural Transformation Needs More Energy The World Bank Page43 The World Bank

44. Uganda’s Infrastructure: Lagging Behind Other Countries The World Bank Page44 The World Bank

45. Uganda’s Infrastructure: Lagging Behind Other Countries The World Bank Page45 The World Bank

46. The World Bank Impetus for Concerns(unanswered by the Bank in 2004-2006) 2002/03 UNHS results, 2004 PEAP and 2006 election – => Growth is slowing, poverty reduction is slowing, inequality rising… • Presidential announcements: • Agricultural Zoning for Production Enhancement • Government to supply agricultural inputs for productivity gain • Government improve credit access and LT financing (UDB, Industrial Fund) This Presentation … Uganda’s Recent Policy Debates • Presidential announcements: • Industrialization / Value Addition for Job Creation: • - Malaysia’s “Big Push” • - “One District One Industry…” • - Encouraging firms to go “up-country” (Land Investments for Enterprise) • 5. “Strategic” Investments for “value addition” and “strategic exports” So….. Is a Mature AFR Reformer Back to Picking Winners ??

47. Uganda’s Growth has outstripped its infrastructure… With the workforce set to double, and agriculture releasing labor, Uganda needs to develop infrastructure to stimulate job growth in the non-agric sector(Cities & Towns are going to be more important) Post Harvest Issues (market demand to shore up prices) as important as productivity What Advice Can The Bank Offer ?? … Consistent Vision, Different Prescriptions The accent should be on finding enhanced infrastructure to support agro-processing for export; which will require transport & lower cost power (In cities and towns where there’s a workforce / net consumers of food) Low cost fuel and transport logistics will also be very important For Uganda’s growth – but are presently being heavily taxed Education needs to focus on quality, strategic skills. If the INF constraint is fixed, financial sector could bind growth next

48. Infrastructure Enhanced Zones => put where? Increased Exports & “Value Addition” => what export products best for growth, located where? High quality education to meet market demand for skills => what skills, how much, what in future? Answering the Next Questions… Isn’t this Industrial Policy…? Strategic Industry Is Transport – Low cost fuel and better transport logistics => How? • Where Next? Should the Bank engage in the more pro-active vision? • Get more involved sector analysis (exports, strategic industry, INF)? • Less generic CODB and ICA averaging on policies and institutions? • Where next with growth ESW in a mature AFR reformer?

49. The World Bank Where Next For Bank Growth ESW? …To Do No Harm.. We Used Spatial Analysis, and we propose sector study of transporters. This Presentation … Is this too little, too late, & too hands-off for our client? Or is it too interventionist for the Bank? Too urban biased, too politically naive, too regionally unbalanced, insufficiently pro-poor?

50. What Type of Infrastructure Is Likely to Produce Highest Returns? Target farm productivity? Target Firms for Jobs? • Where should Infrastructure be located? • using business location models? • why do firms cluster? Agglomeration or INF constrained? Post - CEM: Future Diagnostics… Where Next For ESW To Be Helpful? How does this compare with existing public resource allocations? Can we back likely industry winners, rather than pick them? Where are the exporters (following Teal)? Can we prioritize the needs of these export winners? (Hausman, Hwang and Rodrik, “What you export matters”)