What Uganda needs to do to manufacture more and crack export markets

Four years ago, Uganda adopted a social and economic development plan aimed at creating jobs and raising incomes. The plan acknowledges that Uganda must boost manufacturing, improve its services sector, and crack export markets to realise stronger growth. To do this, it must raise productivity.

Public sector reforms introduced in the last 20 years have improved government effectiveness in Uganda. But economic growth has slowed in recent years in the face of global economic uncertainties, the high cost of credit, and adverse weather that has affected agriculture. Conflict in South Sudan, Uganda’s main export market, has also disrupted trade.

In this context, how could Uganda go about raising its economic growth? New analysis offers some suggestions on how the country can shift its economy to more productive activities. Key findings noted the importance of lowering trade costs, and increasing foreign investment, domestic value addition, competitiveness of the services sector, and export promotion.

Growing the share of manufacturing in the economy is also necessary. Manufacturing has a unique potential to raise incomes and create many jobs for many relatively unskilled workers. Manufacturing also allows for more cost saving at higher levels of production, as well as opportunities for innovation, technological progress and learning-by-doing.

Manufacturing has been stagnant

Uganda’s manufacturing sector has accounted for around 9% of the country’s GDP for the last decade. This is higher than the East African average of around 7.5%. But it’s still smaller than other countries in other parts of the world that have used manufacturing to drive economic growth, such as Vietnam’s manufacturing contributes 15% to its GDP.

This shows that Uganda’s progress towards changing the structure of its economy has been relatively muted. This is also seen through export diversification and sophistication metrics. Greater export diversification shows more products have become competitive enough to export, and it makes the economy more resilient by reducing reliance on a few exports. Export sophistication measures how advanced the goods and services being exported are, with the idea that more sophisticated products need improved production processes.

The country has achieved some export diversification (of both products and export destinations). Services exports, such as tourism, transport and construction have increased notably. But Uganda’s level of export sophistication remains low compared to other East African countries, with most of its merchandise exports requiring relatively little processing, such as tea and coffee.

Size may have something to do with Uganda’s struggle to grow its manufacturing sector. The sector is still very small and is dominated by small and medium enterprises, which make up 93.5% of the sector. The majority of firms are sole proprietorships with annual turnovers of less than 5 million Ugandan Shillings (US$1,389). These manufacturers are mostly engaged in end-product assembly and processing raw materials. The main activity is agro-processing.

Given their small size, firms struggle to achieve production at scale or to sufficiently raise their productivity to absorb the additional costs of exporting. Other challenges include difficulties sourcing high quality inputs, lack of access to finance at affordable rates, and constrained electricity access.

High cost of credit limits firms’ ability to invest in improved technologies. In turn, this means they can’t meet the quality and standards required to crack export markets.

A shifting landscape

But there have been some changes over the past 10 years. Notably, there has been an increase in the share of merchandise exported. This suggests a shift in focus from the domestic to export markets in manufacturing.

Coffee has been Uganda’s dominant export product for decades. In recent years exports of tea, cocoa, fish and tobacco have gone up.

Exports of non-food commodities have also been increasing and diversifying, especially light manufacturing industries such as cement, wood and leather.

Leather products has been the highest growth product group. This growth has been enabled by upgrading the value chain. Uganda used to export mainly raw hides, but by 2015 this had changed and more domestic value addition was taking place.

There have been similar trends in other export goods too. While more than 90% of merchandise exports were primary products in 1995, this has now almost halved.

Export destinations have also been diversifying. In the 1990s around 80% of Ugandan exports went to Europe. Africa is now Uganda’s most important export destination, receiving some 50% of exports.

The diversification of exports as well as the discovery of export destinations indicates some progress in Ugandan firms’ ability to compete internationally.

More needs to be done

Ugandan firms need to start carving out niches in globalised production chains, taking advantage of goods or processes that are relatively cheaper in Uganda than elsewhere. For example, more processing of raw materials could be done domestically. This would raise the country’s participation in global value chains. This, in turn, would increase the transfer of technology and skills.

Experience has shown that participating in light manufacturing global value chains has been an entry point for low income countries to get on the first rung of global trade.

The government has an important role in ensuring policies are conducive for achieving greater growth. Notable initiatives include:

  • Reducing transaction costs and upgrading logistics services.
  • Institutional support to link international firms to domestic suppliers, and to assist domestic producers with entering new export markets.
  • Promoting trade liberalisation. For example, there’s evidence that protecting domestic firms from the world market doesn’t lead to better productivity or competitiveness. Incentives may also be necessary to encourage domestic firms to produce for export rather than the domestic market.
  • Easing credit constraints to help firms move away from cheap, obsolete technologies. With improved technologies firms can produce higher quality goods that meet export market standards and quality.
  • Developing common standards and mutual recognition agreements within the East African Community.
  • Free zones or special economic zones, where improved infrastructure and services could be provided, could achieve success in the short- to medium-term.

Countries such as China and Vietnam have shown that taking these kinds of measures can transform economies. With a strong manufacturing base, a more competitive services sector, and greater value chain participation, Uganda can begin to realise its ambition of creating an economy that produces more jobs and raises incomes.

Sarah Logan is an economist in the International Growth Centre London Hub. This article was originally published by The Conversation.