What Does the `Show Case' Show? Evidence of and Lessons from Adjustment in Uganda

Abstract

Uganda is often seen as an African show case for the beneficial effects of structural adjustment. High growth rates have been combined with a high degree of “ownership” of the reforms. At the same time, critics have pointed to continued aid dependence, and limited growth of the important agricultural export sector. The contribution of this paper to this debate is three-fold. First, “ownership” has not always been exemplary and is still fragile in some respects. Second, although aid has indeed been important for bringing about high growth, aid dependence has diminished over time. Third, there have been real supply responses from the agricultural export sector.

Introduction

Uganda is often seen as an African show case for the beneficial effects of structural adjustment and economic reforms, while the Ugandan experience is also commented upon skeptically. On the positive side, we find an evaluation of International Monetary Fund (IMF) policy based lending stating confidently that:

Uganda has evidently been successful both in terms of stabilization and growth. Over the decade the economy was transformed from a stagnant, subsistence orientation to an economy that enjoyed fast growth. Although there were continuous Fund programs through the decade, most of the key decisions were taken by the government on its own initiative (Botchwey, Collier, Gunning, & Hamada, 1998, p. 87).

Apart from its high growth rate (around 6% annually since 1987), Uganda is praised for its high degree of “ownership” of reforms. This usually means that donors and recipient government converge on the reform package to be carried out. Holmgren, Kasekende, Atingi-Ego, and Ddamulira (1999) depict the relationship between Uganda and the donor community in a similar vein as one smooth process. This contrasts sharply with another view by Himbara and Sultan (1995), who depict Uganda as a new Bantustan which is controlled by funds and personnel from the outside: “In the process donor control has extended over the full range of policy mechanisms, feasibility research, project implementations and management of key elements of the Ugandan state” (Himbara & Sultan, 1995, p. 90).¹

Recently, the quality of the Ugandan growth has also been challenged. Belshaw, Lawrence, and Hubbard (1999) have two main points of critique. First, they do not think that macroeconomic stabilization has diminished the structural weaknesses of the Ugandan economy. They point to a widening gap in the balance of trade, where imports have grown more than exports. In their view, the macroeconomic stabilization which Uganda has achieved is dependent upon foreign aid and has resulted in an increasing external indebtedness. Second, the fundamental weakness which they discern behind these reservations is the lack of a significant supply response in the agricultural sector.

This article challenges a number of conclusions drawn in these debates. We do not dispute that there is a growing trade gap and increased indebtedness in Uganda and that this is related to foreign aid inflows. These do not indicate structural weaknesses in the economy, however, but are to a large extent the consequence of accounting for foreign aid in the economy. A fixation on trade deficit and debt obscures the positive effects of foreign aid, in particular, on stabilization and economic growth. The growth in the Ugandan economy has not been ephemeral either: There have been significant supply responses in the Ugandan economy. These are related to macroeconomic stabilization, to the liberalization of the foreign exchange market and to the liberalization of markets in agricultural produce.

In addition, we think that the degree of consensus between the donor community and the Ugandan government has been overstated, especially if we consider the period before 1993. Policy dialogue or the conditionalities of aid—different words are used depending upon the position in the debate—have played a role in bringing about stabililization and economic reforms. Currently, there is a genuine consensus in two crucial areas: strict control of the government budget and the dismantling of the parastatal and cooperative marketing structures. These reforms have had beneficial effects, and as such they are beyond political debate: it is politically advantageous to identify with success. It may therefore be better to view the relationships between Uganda and the donor community in terms other than domination or cooptation. Donor pressure may have resulted in taking decisions to which there was resistance, but which proved to be beneficial for the whole of society. Important collective choice issues in Ugandan society—notably controlling the government budget and dismantling the parastatal and cooperative marketing structures—can thus be seen as resolved in a policy dialogue with the donor community.

This paper therefore first discusses the relationship between Uganda and the donor community over time, as this is fundamental in the whole problematic. We distinguish two periods, 1987–92 and 1992–98. In the first period, aid was not accompanied with strict conditionalities and few economic reforms were undertaken. In the second period, the government became committed to monetary stability, and many structural reforms were carried out—although sometimes with delays and not always to the full satisfaction of the donor community. Thereafter, we analyze the effects of aid funds on macroeconomic developments. Aid contributed to growth and stabilization in both periods. But in the first period, the achievement of law and order was a major factor in economic growth, while the reforms had a positive influence on growth in the second. The latter half of this paper analyzes the most significant supply responses that have taken place and identifies the links with economic reform.

Although we think that aid and economic reforms have been beneficial to Uganda, this does not mean that we are blind to weaknesses in the Ugandan economy. These weaknesses are, however, of a different nature than those usually identified. First, the capacity of the Ugandan government to contain political demands is crucial in controlling government expenditure. It may be that the limitations on political competition—Uganda, with its no-party system, may be called a one-party state—have made this curtailment of demands possible. Second, the supply response to liberalization may have run its course. Slack capacity in the economy has been taken into production and further growth requires investments, which are often constrained by poverty at the level of the enterprise. Further growth may also depend upon more structural measures. In the conclusion, we address the question of whether and to what extent the Uganda experience is reproducible in other countries.