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How the structure of the Ugandan economy defeats the applicability of Keynesian tools and what to do about it
COMMENT | NNANDA KIZITO SSERUWAGI | John Maynard Keynes, once honoured by Time magazine as one of the three most profound economists that ever lived, wrote The General Theory of Employment, Interest and Money; where he argued and also advocated for government intervention to actively manage economic cycles, contrary to the classical economic thoughts that assumed markets/economies to be inherently self-correcting. His bold ideas, while challenged by equally great economists such as the freest-market advocate, Milton Friedman, pushed several Western governments in the decades following the publication of his magnum opus to use deficit spending, the lowering of interest rates (monetary policy), and taxes (fiscal policy) to stimulate demand and solve fundamental economic challenges like unemployment.
Ugandan economists at the Central Bank and the Ministry of Finance, as well as in formal and informal corners of economic policymaking, such as the Retired-Warrior in Kapeeka-cum-Philosopher Deputy King, Gen. Salim Saleh, have, whether knowingly or instinctively, applied ideas from Keynes or Keynesianism to the management of Uganda’s economic transformation. However, I think that the structure of our country’s economy requires unique and smarter ways of applying Keynesian, rendering the way it has been applied unsuccessful. In other words, Keynes’ economic tools have been misapplied to the Ugandan economy. I will explain how and why.
To begin with, Keynes focused his ideas on a unique context drawn from his experience. What he had in mind was a mature, industrialised economy typical of Western Europe and North America at the time, which had started facing challenges of stagnation and other negative consequences of the Great Depression. Therefore, when we, in poor, developing countries like Uganda, take on his ideas to stimulate growth, we must be keen about the uniqueness of our context from the context under which he prescribed his theories. We must not apply wholesale ideas that were developed to serve a particular economic environment.
Basically, Keynes suggested that to stimulate growth, governments should not shy away from spending a lot of money in the economy, for instance, on infrastructure projects; and they should also consider borrowing or printing money for the same purpose, and that, consequently, this spending would create jobs and increase demand, which would drive economic growth.
Now, when we observe Uganda’s specific situation, we find that our country has a very young – in fact, the second youngest – and one of the fastest-growing populations in the world. That has implications for unemployment. Secondly, we still do not have enough roads (only slightly above 20% of the total national road network is tarmacked), almost half of our population lacks access to electricity, and our schools are still insufficient to cover all enrollable learners. Additionally, banks which would provide finance in the ideal Keynesian recipe book charge very high interest rates, making their money expensive for entrepreneurs who would borrow to invest in enterprises that stimulate growth.
Therefore, the problem at hand is that whereas Uganda’s leaders actually follow principles of Keynes in borrowing and increasing spending, it does not achieve much because our economy is structurally different from the economies of rich countries for which Keynes thought. The result of this has unfortunately been that, whereas the government borrows a lot, it hardly realises any significant growth dividends, yet at the same time increases the debt burden, with about 46% of our budget now going to debt service, which also worsens other fiscal problems. In short, we apply Keynesianism without benefiting from its glorified promises. Taking a blanket approach to Keynesianism, oblivious to our unique context, should be reassessed.
One aspect through which the government has clearly applied Keynes’ ideas, whether accidentally or on purpose, is the Parish Development Model (PDM), under which it extends loans to ordinary people in every parish, wilfully blind to the fact that not everybody is an entrepreneur but hoping that this would increase domestic expenditure in local shops, to local farmers, and to small businesses, which will stimulate economic growth from the ground up. The same may also be said about expenditure on large infrastructure projects in energy, roads, etc. The hope is that since our economy is unfortunately weak and people or businesses cannot be relied on to spend enough, the government can fill this gap by spending more to create what Keynes called “aggregate demand”, i.e., the total spending in the economy. Keynes hoped that the effect of that would be to create a multiplier effect inside the economy.
Unfortunately, when you look at it critically, that’s not how it plays out in Uganda. The immediate effect is that the money leaks out. Since not every peasant who gets PDM money in a parish is an entrepreneur, when they receive the money, they are likely to spend it on non-economically rewarding activities like buying a motorcycle, marrying a second wife, or other pleasures they have longed for. Even when they decide to spend it on seemingly productive endeavours like buying fertilisers for their crops or solar panels for their homes, this money is consequently lost to foreign markets, mostly in China. Even when the government undertakes large expenditures on mega infrastructure projects like building roads or dams, this money is lost on importing machines, hiring expatriates, and consequently leading to capital flight. This renders Keynes’ assumed “multiplier” effect negligible since the money that remains in circulation in Uganda is very little.
To fix this dilemma, intent must be on import substitution as a priority, so that as much as possible, the key goods and services that run our economy are procured domestically. A bigger multiplier effect and real growth can only be achieved if the money does not fly out of the country as soon as it is put into circulation. And since we also have to buy U.S. dollars to buy goods and hire services from abroad, it further erodes the value of our currency due to bizarre forex rates.
Keynes also invented the idea of “animal spirits”, describing an optimism and confidence that actually drives investors to spend as opposed to being driven by logical calculations and objective considerations. The government can be said to invoke that spirit through huge investments like the Tilenga and King Fisher oil fields, hoping that with the visibility of large multinational oil projects setting up, local entrepreneurs will be incentivised and excited to invest in hotels, logistics, etc., an optimism that will stimulate the economy with spending. Unfortunately, given the structure of our economy, the apparent risks of leaks through high interest rates and importing key goods and high-skilled labour still create a hidden problem.
No business person invests unless they expect to make a profit, and with these runaway interest rates in our banking sector, it is not very inspiring for entrepreneurs to follow their gut feelings. It does not help for the central bank rate to be below 10% if commercial banks lend at over 20%. This gap must be fixed by steadily dismantling the commercial banks’ oligopoly by creating alternatives for entrepreneurs and industrialists through creating special development banks (more UDBs), which can lend at much lower rates. High borrowing costs kill investment appetite and consequently dwindle entrepreneurial optimism. Additionally, the government should disincentivise commercial banks from lazily buying government bonds, which they prefer to lending to our productive entrepreneurs. It can also innovate ways to guarantee and share risk on SME loans to encourage banks to lend to budding businesses.
While Keynes advocated for governments to create public works, e.g. roads, to solve major problems like unemployment, Uganda’s approach, both through executing public works and also establishing youth skilling programs to generate employment, still lacks the spark that Keynes foresaw. The reason for this is the illusion of the “informal sector”, which we often pride ourselves on for reducing unemployment, yet what it really does is to mask street vendors, tiny business owners, subsistence farmers, and many low-productivity workers who create no real growth, while also, unfortunately, disguising unemployment. So, whereas many people celebrate the vitality of our “informal sector”, the serious problem it carries is that it hides huge underemployment. Therefore, we must measure the true challenge of unemployment or disguised underemployment in order to address it more attentively, for instance, by matching it aptly with funding for public works at a much larger scale.
Keynes’ ideas were, on the face of it, meant for advanced economies with mature banking systems, strong factories, an industrial base, and measurable, as opposed to disguised, unemployment. Since we still lack this economic structure in Uganda, we should not copy-paste Keynes blankly. We must first fix the missing structural foundations upon which Keynesian tools are to be applied.
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The writer is a Ugandan thinking about Uganda.
