What Makes an Economy Tick?

Here are two anecdotal stories that tell you lots about why economies work or not. The first one is about a South African investor who came visiting last Sunday. Amazing woman. Breeds and rears chicken for yellow yorked eggs and employs many low skilled Ugandans. When I asked her about business she said it was slow but they were getting on. The rearing business was tougher. If there were no buyers for the day old chicks, then they would have to get rid of them because they could not afford to feed them. ‘And the workers? How are you managing them?’, I inquired. She said it was tough managing them, but they are given incentives like lunch to stop them pilfering. If the lunches are stopped then they go hungry and the pilfering increases noticeably.

Story two is also connected to story one but in a roundabout way. I love staring at the fully packed shelves in the Supermarket(s) and wonder at the genius of industry and making things. I don’t just look at the goods on display, but I keenly observe the names of the companies that make them. I can comfortably tell you that not very many shelves bear products made by Ugandans. All the big name brands are either multinational companies or foreigners who have come here to ‘invest’.

What is common about these two tales is that they reflect the reality of what is called Uganda’s real or essential economy – the economy where real goods get produced and sold. Tale one is about primary production and tale two is about marketing the produce of the real economy. What these stories actually do tell us is that Ugandan’s are getting to be employed in the formal economy and earn wages. And that is a good thing! But they also do tell you that Ugandan’s are playing a peripheral role in the real economy as low skilled labour – feeding the chicken and packing the stalls. They earn wages that are commensurate with the supply and demand for these low-level entry jobs.

And that is the problem with making the economy tick. The majority of these Ugandans hardly command any purchasing power to write home about. A significant number of Ugandans are peripheral players, even if they have entered the formal economy.  And that’s less than 30% who are said to be involved in some sort of formal activity! They earn peppercorn wages and are therefore hardly able to consume significantly or effectively.

Therein lies the rub and challenge for us. If your population cannot consume, or do not have effective demand, it is very difficult to make the economy tick. So while our population is about say 80% of Kenya’s, the economy is probably about a third of the Kenyan in size. Or take that recently ‘notorious’ country called Iceland (you can ask the English!). The population is about 320,000 people. Its Gross Domestic Product (value of all goods and services) is about US $ 17.04 billion and the per capita income is US $ 60,000 per person. You don’t need any more lessons in what effective demand and consumption mean!

To make our economy tick, we must work ceaselessly to enable more and more Ugandans to consume. Effective consumption means that we can all buy mundane things like soap, sugar, salt, and some sort of education and health. Forget Leontief models. Those are things for high-minded economists. What underdeveloped countries like Uganda need to jump out of the poverty trap is to empower their citizens to consume. That way, manufacturing locally makes sense. Effective demand creates its own supply. But because we cannot consume, we seem to have moved from being an agrarian led economy to one where the services sector is growing much faster. Last year (2015/16) the agriculture sector grew by 3.2%. Manufacturing grew by 3.0% and services grew by 6.6%! That is not a bad thing necessarily but that means more and more Ugandans remain ineffective consumers and the commanding heights of the economy remain elusive despite the obvious growth.

Very few people have the skills demanded by the services sector (you can ask those failing the member of parliament test). So the labour intake in the services sector is not as large as say would be required in manufacturing. What we need to put our mind to is how can we (a) increase the incomes of our people to create effective demand and (b) how can we enhance manufacturing to create jobs with a higher skill level. I can only suggest two things. One there must be a more equitable distribution of incomes, and that is a national issue. But that income also needs to be created by all of us nationally. If our people have incomes to spend, they can improve their skills level to take up jobs what would be created in an expanding manufacturing sector. You see nothing succeeds like success, but success comes from commitment and being purpose-driven.