Ggoobi calls for careful balance between taxes and agro-processing to anchor import substitution strategy
Ramathan Ggoobi, a rising voice of reason and influence on Uganda’s economic policy, argues that investment in agro-processing and light manufacturing, needs to be carefully balanced with external taxes to avoid retaliation especially from regional neighbours
The economic disruptions arising from the COVID-19 pandemic, have triggered radical shifts in policies by many governments around the world with many tending towards reducing dependency on other countries and instead increase local manufacturing capacity to boost self-sufficiency, create durable jobs and tame demand for foreign exchange.
And while this may have coincided with the resurgence of protectionism, it’s consideration by Ugandan authorities has been precipitated by the COVID pandemic and Uganda’s worsening trade deficit that now stands at US$3.9bn from just US$50m in 1980.
In fact, Import Substitution Industrialization (ISI), as Ggoobi pointed out, is not entirely a new policy, but rather a key feature of Uganda’s third National Development Plan’ (NDPIII) 2020 – 2025.
However Ramathan Ggoobi, in a timely policy critique of Uganda’s ISI strategy, warns that there are reasons to worry that the latest effort may end in failure, as many previous attempts.
He cites the government’s aggressive tax policy on imports, which is not backed by a deliberate plan to grow local manufacturing capacity, weak implementation, corruption and adhoc interventions which some have termed as presidential initiatives, as threats to the new ISI effort.
“Research shows that using trade policies to protect the Import-Substituting domestic industry tends to discourage exports. This is because the resources employed in the protected industry would otherwise have been employed elsewhere,” says Ggoobi.
He adds: “For import substitution to reduce leakages Uganda is currently suffering, focus should mainly be put on manufacturing firms (both light and heavy) that source local raw materials. However given limited resources (capital, skills and technology) for industrialization, import substitution should not be promoted at the expense of strong output and employment multipliers.”
He argues that high taxes on imports, especially for inputs for industries, is likely to hurt exports by making them uncompetitive.
For this reason, Ggoobi advocates for an industrial strategy as opposed to trade policy in implementing the ISI strategy.
He cites agro-processing as having the highest potential in exports and jobs creation.
“If Uganda fully exploited her untapped export potential, it is estimated to result into over 1.9 million jobs (44% being direct jobs and the rest indirect).
Using the industrial approach, Ggoobi calls for the development of (light and heavy) manufacturers that source raw-materials locally.
A more active state
Ggoobi calls for a more active role by the state in supporting nationals or domestic industries to thrive by;
1. Picking winners – specific Investments whose fortunes can only be realized in a medium to long-term.
2. Insisting on partnerships between foreign and nationals to facilitate technology transfer.
3. Gradually phase out subsidies using strict monitoring and performance indicators.
4. Providing backing for private companies in accessing markets in the region as well as internationally.
5. Demanding reciprocal market access for Ugandan products from countries that enjoy Uganda’s market such as China and India.
Ggoobi’s call for targeted investment views received applause from many participants including the Minister for Investment Evelyn Anite who officiated at the launch of the report at Serena Kampala Hotel.
She particularly praised the proposal on introducing strict conditions and penalties for investors, in case they fall short of promises.
In a rather surprising observation, Ggoobi notes that the same industrial approach has been pursued since the early 1990 but without success.
He blames this on a number of factors ranging from the neo-liberal policies of deregulation that weakened the role of the state and left ‘results to chance’ rather than deliberate steps by the state.
Weak implementation characterized with lack of clarity on mandates for industrial development various government agencies, as evidenced by the fights between the ministries of trade and that of finance, have undermined the ISI agenda.
His call for the creation of a separate Ministry for Industry and Investment that should be a clearing house for all relevant queries from potential and existing manufacturers, was a challenged as an extension of the government bureaucracy.
All said and done, the view expressed by Ggoobi that success and failure of ISI are strongly determined by the will of the leaders, was shared by many participants.
“Uganda’s industrialization intentions will be turned into sustainable results only if the key players (those who are highly interested and powerful) are mobilized to lead the agenda and the subjects (those who are interested and powerless) are empowered by giving them more formal authority and resources.