Why is Uganda getting unequal?

I know I am going to sound very unreasonable and perhaps wrong to many people mainly because the popular view among Uganda’s elite and our multilateral friends — the IMF, the World Bank and others — is that Ugandan economy is fast transforming. This erroneous belief has been caused by the poor metrics used to measure economic progress — GDP (gross domestic product).

Few countries can provide a perfect laboratory for testing the myth of high GDP growth like Uganda does. Although everyone you will listen to will love to compare the GDP and GDP growth rate between 1986 and now to show how fast the economy is transforming, GDP does not tell us what the typical Ugandan has experienced in the last 28 years. If Sudhir Rupaleria and Gordon Wavamunno’s incomes go up by say a factor of 5, the average income for Uganda goes up five fold. This is actually the very story that has played out in Uganda.

We are still basing our metrics on the old economics that lead us to make incorrect inferences. We also forget that even rising traffic jams and potholes may raise GDP as a result of increased use of fuel and spare parts but obviously not the quality of life of Ugandans.

Modern economists use not the GDP per capita (income obtained when GDP is divided equally among all people in Uganda) to measure progress, but a more meaningful metric of the median income — the income of the family in the middle.

Rent seeking in Uganda

Before I digress so much, let me get back to the question I set out to think about: Why is Uganda getting unequal? Even at a time when education is fast becoming universal, why is it that the children of the poor are still disadvantaged with their fast-class degrees? Why do opportunities in Uganda seem reserved only for those who were born in the “right” families?

Mr President, in economics they teach us that inequality does not happen; it’s created! Government policies play a role in creation of inequalities, as does market forces. Modern economists are of the view that it’s political forces, more than economic or market forces that explain today’s inequalities.

It’s government that gives away resources. It’s government that modifies the distribution of income and alters the dynamics of wealth. If government doesn’t ensure that markets are competitive, there can be large monopoly profits. If institutions are weak, selected groups of people would have enormous powers, including the power to set their own wages, bonuses and allowances (a case of MPs, KCCA officials, NSSF managers etc).

Similarly, if excessive powers are vested in particular groups, they will use them to limit the extent of redistribution and also to shape the rules of the game in their favour and thus extract from the public large “rents”. This is what is referred to as “rent seeking” — getting income not as a reward to creating wealth but by grabbing a large share of the wealth that would otherwise have been produced without their effort.

Mr President, under your watch, those at the top of our society have developed ways of sucking out money from the rest in ways that the rest are hardly aware of.

Economists believe that there are two ways to become wealthy: to create wealth, or to take wealth away from others. The former adds to wealth, while the latter typically subtracts from it, since the process of taking away destroys some wealth (rent avoidance, taxation, monopoly profits — created by overcharging and restriction of production).

Conspiracy against the public

Today, most of the wealth among a few Ugandans stems from wealth-transfers instead of wealth creation. This is worsening inequality in the country. Like I have written in these pages before, all this emanates from NRM’s policy of allowing laissez faire economics to rule.

Mr President, even Adam Smith, the grandfather of capitalism, was aware of the failure of markets to align private returns and social benefits. He wrote, way back in the 18th Century thus “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Economy only prospers when government reasonably corrects what economists call “market failures”. Capitalists often act in such a way to ensure markets don’t work well. They make more money under market failures. Making markets less transparent has become the most urgent preoccupation of firms in Uganda, notably banks. What’s more surprising is that your government, Mr President, and its agencies such as Bank of Uganda, seem to be in cohorts with private rent seekers.

In Uganda’s banking sector, for example, it’s difficult for customers or borrowers to know whether they are getting a good deal. Everything is negotiated, as opposed to how a transparent, open, efficient and competitive market should be.

And since the bankers are in the business constantly, and the borrowers and other customers enter episodically, the bankers have more information than the borrowers. They use that information to their advantage. So they easily extract money from borrowers, yet it’s not uncommon to hear the Bank of Uganda officials assuring Ugandans how the banking sector is a free market and they should bargain with the banks for the lending rates.

Public auction of loanable funds and other bank products, by contrast, would ensure that these products go to those who value them most which is the hallmark of market efficiency.

How lawyers are playing a part!

Professor Joseph Stiglitz who won the Nobel Prize in economics for his work in information asymmetry has on several occasions revealed how the financial sector has developed expertise in a wide range of forms of rent seeking, through which it takes advantage of the market and government authorities to favour itself and increase its profits at the expense of the rest.

One of the ways banks take advantage of their unsuspecting clients, according to Stiglitz, is through selling products such as loans that they had designed to fail, but knowing that their customers cannot detect that. Economists call this predatory lending. I have seen several media stories where clients of banks, have cited trickery by bankers leading to loss of property that borrowers deposit as collateral. This predatory behaviour is number one cause of the social injustice and overall inefficiency in Uganda’s banking sector.

Stiglitz visited Uganda a couple of years ago and delivered a superb lecture on this very subject. He advised the BOU to adopt strategies that would prohibit banks from charging very high lending rates, obfuscated by several unjustifiable fees, and to closely monitor and regulate banks. However, the monetarists at BOU seem to have learnt nothing from Stiglitz’s wise advice. These rent seeking activities have just worsened in Uganda.

Mr President, another nasty form of rent seeking that is shaping Uganda into a very unfair country is getting public assets at below fair-market prices. Everyone agrees that it’s not hard to become wealthy if government sells you for UShs. 100 million a company or any asset worth UShs. 10 billion. Mr President, you have turned Uganda into a country of oligarchs courtesy of your unwarranted generosity and recklessness in the way you deal with public resources and assets.

Another group of rent seekers that is helping turning Uganda into a predatory park consists of lawyers. Many Kampala lawyers have accumulated lots of wealth by helping other rent seekers to skirt the law. Some helped to write the complex tax laws in which loopholes were put so their clients can avoid taxes. They also helped design contractual arrangements that generated monopoly power within the law and thus helped enrich a few people at the top. For that role, a cross-section of senior lawyers annually gets amply rewarded.

Regulatory capture

It is in Uganda where certain people are allowed to set the rules and at the same time pick referees! Leaders use their political influence to get people who are sympathetic to them appointed to the regulatory agencies This has bred all forms of “regulatory capture” (a concept pioneered by George Stigler way back in 1971).

Mr President, on several occasions, I have heard you wondering why many Ugandans continue to rot in poverty yet your government has over the years introduced innumerable programmes to fight poverty. The answer is simple: most of the economic benefits that NRM has brought and continue to create are going to a few individuals who already have a lot.

This is mainly because your government has absolutely done nothing to ensure resource distribution, other factors such as corruption notwithstanding. I will never forget what BOU Governor, Tumusiime Mutebile, once said, “Let those who have eyes to see where money is, amass it”. Meaning? Those without those “eyes” should die! Of course this is not sustainable.

Like I said here a couple of weeks ago, if the poor fail to sleep because they are hungry, the rich too won’t sleep when the poor are awake!

Comments

comments