Download Growth accelerations in developing countries: Uganda and

Growth accelerations in developing countries: Uganda and Cambodia compared.
Andre Leliveld.
ABSTRACT
1. Uganda and Cambodia are both post-conflict countries that have achieved
relatively rapid growth in recent years. The paper addresses two questions: (1)
what are the main determinants behind the growth accelerations in both countries
and (2) how sustained were and are the growth accelerations.
2. A particular pattern of growth acceleration is associated with post-conflict
countries: immediately after the end of the conflict there will be high growth from
a low base carried to a large extent by external support. This tends however not to
be sustained. Uganda and Cambodia are at variance with this experience
3. Both countries experienced a period that can be called sustained growth during
the 1960s. This lasted until the onset of conflict that can in both countries be dated
to 1969.The first striking turning point in both countries is therefore in the early
sixties.
4. The quality of growth in that period can be questioned:
(a) It was to a large extent state led and did not address fundamental
disequilibria. Massive foreign aid ameliorated continuing deficits on the
trading account, the government budget and on the savings account in
Cambodia. Inflation eroded incomes so that ordinary Cambodians did well
if they maintained the same standard of living.
(b) Uganda relied heavily on import substituting industry and expansion of
government. Here as well persistent imbalances are present: Private sector
savings and investment particularly were slow. This led to two responses.
The late Obote years showed a move to the loft to increase state control.
After the overthrow by Amin (1969) the Asian business community that
controlled most of the private sector was expelled.
5. The pre-civil war period in both countries that were characterised by active
government involvement in what remained a market economy was too short to
give a definite judgement on its effectiveness. Whether these were spendthrift
economies or necessary attempts to break colonial patterns remains a question.
6. Both countries faced a period of authoritarian rule and civil strife and that gives
the second turning point. In Uganda this lasted from 1971-1986 under the regimes
of Amin and Obote II. Cambodia's Prince Shihanouk was overthrown in 1970 by
Lon Nol. Thereafter it was succeeded by the 'auto-genocide' of Khmer Rouge rule
from 1975-78. From 1978 until 1991. The periods of civil strife were disastrous
for both countries and real per capita GDP plummeted as well as life expectancy
rates.
7. Political stability returned in both countries after authoritarian rulers that allowed
a certain amount of democratic control came to power. Yoweri Museveni in
Uganda in 1986 and Hun Sen in 1993. That is the third turning point
8. This political stability provides the backdrop to a road of economic recovery with
high growth rates and remarkable reductions in poverty headcounts. Both
countries are untypical for a general pattern. Usually post-conflict rebounds last
six years and in general growth spurts run out after about eight years when they
come up to a binding constraints.
9. Both countries embarked after initial experimentation with continued state
involvement on neo-liberal style policies. In Uganda after Museveni came to an
agreement with the donor community in 1989. In Cambodia the process started
already under Vietnamese rule in 1978 and the neo-liberal agenda was fully
embraced after the elections of 1993. These are the fourth turning points.
10. Adherents to neo-classical economic theory will quickly point out that this is due
to three broad principles: openness, sound money and property rights. However,
this statement can be questioned and that can lead to important areas for further
research.
11. Uganda:
(a) In one aspect a neo-liberal explanation fits best: devaluations led to
exchange rates that were much more profitable for producing tradables.
This was accompanied by the abolition of marketing boards so that supply
and demand could meet more freely. An overvalued exchange rate
benefits the local elite that have access to cheap imports most. Museveni
therefore attacked through market reforms the privileged access to rents
and productive sectors were stimulated.
(b) (b) However, it may also be that rebound effects have lasted longer in
Uganda than is normally assumed. It is only by the late 19990s that real
per capita GDP returned to the 1971 level. This is significant as in recent
years the rate of economic growth is slowing down.
(c) Some of the rebound was due to exceptionally good coffee prices in the
first half of the 1990s. Part of the slowing down may be explained by
worsening of the terms of trade from 1998-2004
(d) The aid flows that have reached the country are another major factor
explaining the economic recovery of Uganda. Foreign aid has made up on
average 14% of GDP and nearly 40-50% of current expenditures of
government budget.
12. Still, there remains a challenge to explain economic growth at high rates despite,
for example: a banking crisis, drought and major power shortages.
13. Cambodia:
(a) similar to Uganda, Cambodia embraced three major reforms after 1993:
inflation stabilisation; exchange rate reforms and fiscal reforms.
(b) A rebound effect has been strong in Cambodia as well. Only after the
1998 election that brought stability through coalition governments could a
development policy be realised.
(c) Despite advocating a strong development orientation, Cambodia has to
rely also heavily on foreign aid to meet targets in public investment and
social development. Donor support averages 12% of GDP.
(d) More so than Uganda, growth in Cambodia is stimulated by external
developments outside government policy. A favourable position to benefit
from U.S. tariff reductions led to a fast growth of garment and textile
exports.
(e) Tourism attracted by the rich architectural Hindu heritage developed
spectacularly after stability was re-established.
14. The outstanding problem:
(a) Uganda: Analysis of the sectoral composition of growth shows that it has
been driven mainly by expansion of services, notably community services.
These are donor driven. Growth in agriculture has stagnated as compared
to other sectors. Nevertheless agriculture has been an important source of
new exports, fish, flowers and other horticultural products. However, this
affects only a small part of the agricultural sector. The smallholder sector
is far less commercial and remains the main employer. Productivity
remains low in this sector and soil depletion is a major threat. In general
economic growth in Uganda seems to be donor driven and developing an
enclave economy where cash is dominant and of which the rest of society
is excluded.
(b) Cambodia: Here development can be even more seen as an enclave
development. The main driver of economic growth is industry, but that is
from an extremely narrow base in garments only. The enclave nature of
tourism development is obvious. Construction is the third growth sector in
Cambodia and is of course also related to the first mentioned. Growth in
the agricultural sector has after the post reconstruction rebound been slow.
Yet it is in the rural areas that most Cambodians live and where they find
employment in agriculture.
DRAFT
Growth accelerations in developing economies;
Uganda and Cambodia compared
Working Paper for the Tracking Development Project
(version October 2008)
André Leliveld
African Studies Centre
P.O. Box 9555
2300 RB Leiden
Tel. ++ 31 (0) 71 527 33 63 / 72
e-mail: [email protected]
1
Growth accelerations in developing economies;
Uganda and Cambodia compared
André Leliveld1
(Version October 2008)
1. Introduction
How to attain a process of economic growth in a sustained manner is just about the
most important policy question in (development) economics. Economics have long tried to
shed light on why some countries grow faster than others through cross-country (econometric)
analysis of economic policies and outcomes. The policy prescriptions coming out of this work
have tended to be summarized under three broad principles: openness, sound money, and
property rights (Hausmann et al. 2005:303). A major problem of the cross-country growth
regressions is that they are based on very strong assumptions about a single linear model
being appropriate for all countries in all states, it does not focus on what is perhaps the most
telling source of variation in the underlying data; specific growth features tend to be averaged
out in cross-country data analyses (Hausmann et al. 2005a:305). As Easterly et al. (1993) first
pointed out and many others have confirmed since, growth performance tends to be highly
unstable. Very few countries have experienced consistently high growth rates over periods of
several decades. The more typical pattern is that countries experience phases of growth,
stagnation, or decline of varying length (Pritchett 2000). For instance, several cross-country
studies on Africa show the divergence of African growth and development paths, and
underline the diversity in economic progress in time and place for Africa as for any other
continent.2 Hausmann et al. (2005a:304) argue that if we are interested in identifying the
relevant growth fundamentals, the best strategy would be to identify turning points in growth
experience and asking for what determines these transitions.
More recent work on economic growth therefore begins by empirically identifying
turning points and growth episodes and then examine their determinants instead of postulating
a common model of output determination and dynamics.3 Instead of making use of crosscountry data sets, comparing a large number of countries across continents, studies on
economic growth and development increasingly use country case studies to gain more insight
in the deeper determinants of economic growth and development in particular cases. Recent
examples are the studies by Ndulu et al. (2008), who compare the political economy of
growth patterns of landlocked, coastal and resource rich countries in Africa, and country
studies that apply the so called ‘growth diagnostics framework’ introduced by Hausmann et
al. (2005b). The latter involves a growth diagnostic analysis on a country-specific basis that
1
André Leliveld is an economist and senior researcher at the African Studies Centre, Leiden, the Netherlands.
For contact: [email protected]. This paper is part of the research project ‘Tracking Development’, initiated
by the Royal Netherlands Institute of Southeast Asian and Caribbean Studies (KITLV) and the African Studies
Centre (ASC) at Leiden, the Netherlands. The research is conducted in collaboration with eight research
institutes in Southeast Asia and Africa. The Tracking Development research project seeks answers to the
question of why Southeast Asia and Sub-Saharan Africa have diverged so sharply in development performance
in the last 50 years by comparing in detail the developmental records of a number of case study countries
(Nigeria, Kenya, Uganda, Tanzania, Indonesia, Malaysia, Vietnam and Cambodia). For more information, see
the Tracking Development website: www.trackingdevelopment.net.
2
See, for instance, Akyüz & Gore (2001), Berthélemy and Soderling (2001), Collier & Gunning (1999),
Johnson et al. (2007), Ndulu et al. (2008), Sender (1999), and the World Bank’s Africa Development Indicators
publications.
3
Examples of this more recent work include Pritchett (2000), Ben-David and Papell (1998), Hausmann et al.
(2005), Jones and Olken (2005) and Jerzmanowski (2006).
2
aims to pinpoint the most binding constraints to economic development (see, for example,
Calvo 2006, Enders 2007, Ianchovichina and Gooptu 2007).
The method of detailed country case studies is also applied in the Tracking
Development research project, in which pair-wise the growth and development performance
in the last 50 years of countries in Southeast Asia and Sub-Saharan Africa are compared. The
leading question in these country-pair comparisons is why the growth and development
performance have diverged so sharply between southeast Asian and Sub-Saharan Africa in the
last 50 years. Other comparative studies on the development trajectories of Sub-Saharan
African and East and Southeast Asian countries have also seek to explain the developmental
divergence between the two regions since the early 1960s, when initial economic and social
conditions were assumed to be the same across the two regions.4 One of the country pairs in
then TD project contains Uganda and Cambodia, two countries which at first sight appear to
converge rather than to diverge in their development trajectories. After their independence
Cambodia (1954) and Uganda (1962) had a period of growth acceleration, but these starts
were brutally interrupted by long periods of authoritarian rule and civil strife, which greatly
disrupted economic life and undermined many of the foundations for national development.
After the periods of violence and conflict, Uganda and Cambodia embarked on a threefold
transition process. Firstly, they moved from civil war to peace. Secondly, their economies
shifted from a state coordinated towards a market based economy. And thirdly, they have
undergone a transition from one-party to multi-party politics. In both countries these
transitions are more fully completed in some respects than others, and have given rise to a farreaching but still imperfectly understood set of social and economic changes. This paper seeks
to compare and understand the nature of the growth accelerations that have been taken place
in both countries in the pre- and post-conflict periods. In particular the post-conflict era is
interesting. Also in this respect remarkable convergence can at first sight be observed. Both
countries have shown consistently high GDP growth rates since peace was restored. For
Uganda, average growth rates were 6.7% for the period 1986-1996 and 5.7% for the period
1996-2006, which is high for African standards. Cambodia shows similar high growth rates,
averaging 8.8% over de period 1996-2006, even outperforming neighbouring emerging
economies Vietnam and Thailand.5
The paper addresses two questions: (1) what are the main determinants behind the
growth accelerations in both countries, and (2) how sustained were and are the growth
accelerations? Findings from elsewhere, for instance, suggest that what is associated with
growth accelerations is not necessarily what keeps growth going (see Johnson et al. 2007,
Hausmann, Prichett & Rodrik 2005). Moreover, other post-conflict countries have exhibited
high rates of economic growth as well (including Afghanistan, Liberia, the Democratic
Republic of Congo, Mozambique), but this has mainly been a reflection of high levels of
donor inflows and a very low starting point. And we also know that the growth challenges for
post-conflict countries are different from countries that have not experienced major conflicts.
The plan of this paper is a follows. In Section 2, the context is briefly described by
presenting growth patterns of Uganda and Cambodia in the last 50 years, and by identifying
turning points and growth accelerations. Section 2 continues then with an analysis of the preconflict growth accelerations. Section 3 goes into more detail by discussing the basic
characteristics and sustainability of economic growth and development in the post-conflict
period. Section 4 concludes by summarizing the main findings and by identifying on base of
4
Examples of such studies include Agbeyegbe (2006), Barro (1991), Bräutigam (1994), Garnaut et. al (1995),
Harrold et al. (1996), Lawrence & Thirtle (2001), Lewis (2007), Ntimba (1996), Roberts and Fagernäs (2004),
and Wangwe (1998).
5
Figures derived from World Bank’s ‘Uganda at a glance’ (http://devdata.worldbank.org/AAG/uga_aag.pdf)
and ‘Cambodia at a glance’ (http://devdata.worldbank.org/AAG/khm_aag.pdf).
3
this paper future research directions for this country comparison in the Tracking Development
project. For the analysis in this paper I made use of secondary data and existing literature on
economic growth and development in both countries. Generally, the contemporary economic
history of Uganda is better documented than the history of Cambodia’s economy for which
most of the (still relatively scarce) economic literature focuses on the period after 1991, when
peace in the country was restored. This may hamper the analysis on explanations for today’s
economic performance and structures, in particular when these explanations may lie in a
further past that has not been adequately described in literature.
2. The period 1954-1970: mountains high, valleys deep
There is an overwhelming amount of cross-national econometrics on economic growth. But
one of the curious aspects of this huge empirical literature is that practically none of it has
focussed on turning points in growth performance (Rodrik 2004:7). If we want to understand
what is needed to spur economic growth, it stands to reason that we would want to look at
what actually happens with policy at and around the time that growth receives a significant
boost. Yet standard growth empirics simply averages policies and performance during 5-, 10-,
20-, or 30-year periods, completely disregarding turning points within these periods (Rodrik
2004:7). This section is meant to briefly explore turning points and growth accelerations in
the economic history of Uganda and Cambodia since independence. For this purpose Figure1
presents real GDP per capita developments in both countries over the period 1950-2003.6
Figure 1 Real GDP per Capita 1950-2003
7,50
(Ln) Real GDP per Capita
7,00
Cambodia
Uganda
6,50
6,00
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
5,50
Year
Source: Heston et al. (2006)
Figure 1 clearly shows episodes of growth and stagnation in both economies. For Uganda two
growth periods stand out: the period 1961-1969, following independence in 1962, and the
6
For the GDP per capita figures data from the Penn World Table (PWT 6.2) are used. The PWT provides
purchasing power parity and national income accounts converted to international prices for 188 countries for
some or all of the years 1950-2004. For Cambodia, data are available from 1970 onwards.
4
period from 1988 onwards. For Cambodia there are also two periods that can be singled out,
1954/1969 and 1987 up to now. In the remainder of this section the focus is on the first
growth period in both countries, the next section will focus on the more recent growth period.
For Uganda, the first period shows a continuous growth of GDP per capita, though the
average GDP growth rates over the period 1961-1969 is modest with 4.8% and highly uneven
throughout the period (see Figure 2). Also here there is much convergence with Cambodia,
for which GDP per capita figures are not available for the period 1954-1969, but Figure 3
shows that annual GDP growth rates are substantial, averaging 6.6%, though highly uneven
throughout the years as well. In both countries more sustained growth can be observed
Figure 2 GDP Growth Rates Uganda 1960-1970
14
12
GDP growth rate (%)
10
8
6
Uganda
4
2
0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
-2
Year
Source: Bigsten & Kayizzi-Mugerwa (2001:16, Table 1.1)
In these periods economic policies in both countries were dirigiste. In both countries the
government believed that assuming a lead in all the major economic activities was the best
way of ensuring rapid employment creation and growth. When Cambodia became
independent in 1954, its government under King Sihanouk remained with a colonial heritage
which was strictly non-industrial: fishing, agronomy, spice cultivation, and (rubber)
plantations. Between 1955 and 1960 Cambodia’s first state-led push for economic expansion
and modernization began (Ear 1995:40). An own currency, called the ‘riel’ was introduced,
and Cambodia took a socialist and Non-Aligned Movement road to development that was
marked by the use of agricultural cooperatives, state-owned enterprises, and numerous
construction projects. There was a strong emphasis on capital formation through public
investment largely financed through foreign aid; private investment was not take into
consideration. From the 1950s onwards on average 38% of the budget was directed to
agriculture, 38% to infrastructure, 19% to social spending (education and health), and 5% to
everything else (Ear 1995:41). Descriptions from the scarce literature on the 1964-1970
period suggest that industry grew rapidly in these years. In 1955 there were 650 small and
medium private factories, in 1968 their number had grown towards 3,700, apart from the 48
large state-owned factories (of which 20 were a joint venture between private and public
capital) that had been established since 1955. Ear (1995:49) concludes that by 1968,
Cambodian industry had made considerable headway. Within agriculture Cambodia
5
developed from being self-sufficient in rice production in 1955 to a rice exporting country in
the late 1960s. Fertilizer use had increased 13-fold in the period 1961-1967 (Prud’homme
1969:73) and in the late 1960s Cambodia seemed on the verge of a Green revolution (Ear
1995:50).
Figure 3
Source: Etcheson 1984: 20.
Despite the progressive developments mentioned above, existing sources also refer to
several constraints in the 1954-1968 economy that compromised economic development and
prevented a real ‘take-off’ of the economy. For instance, no policies were set in place to
reduce the large balance of trade deficits during the 1950s and 1960s. The loss of foreign
exchange reserves should have forced the government to devalue to keep imports down and
promote exports, but the interests of the urban elite to have access to cheap luxury imports
played an important role in the political decision making not to do so. In addition, the savings
rate in the Cambodian economy continued to be low. Although Prud’homme (1969:222) finds
that the level of private savings in Cambodia was 10%, a sufficient level, he also notes that
these savings were kept in the form of cash and valuables which were not themselves
available for investment. With hindsight, the 1963 nationalization of banks, whereby more
than ten private banks were replaced by two State Banks (one for credit, one for commerce)
did nothing to boost the view of banking in the eyes of Cambodians either (Ear 1995:63).
Ineffective tax policies also created large budget deficits over the period 1959 to 1966,
leaving Cambodia struggling with three gaps: a trade deficit, a budget deficit, and a savings
deficit. Massive foreign aid curtailed the deficits and only exacerbated the problem. Though
in the 1950s and 1960s aid was crucial to Cambodia’s economic design – infrastructure,
6
schools, health, etc., its size and fungibility did not help to create incentives for the
Cambodian government to introduce drastic reforms that could help to reduce the gaps (Ear
1995:63).
Ear (1995:46) also refers to educational policies that missed the mark on at least two
pints: the French education system was adopted, which emphasis was never on basic science,
but civil service, which has seldom been know to spurt economic go-getters, and the
employment opportunities, when available, were all government sponsored. The lack of
investment in agricultural technology to create sustained economic growth was another factor
at play. Though fertilizer use increased, agricultural output increased not just from new
technology but mainly from increasing the area of arable land used. The latter can, among
others, be attributed to a remarkable feature of Cambodian demographics: relative to other
countries in the region, Cambodia has a low population density.
The contradictory pattern of economic activity expressed itself in a general decline in
purchasing power; per capital national income increased but most of that was withered away
by an inflated Consumer Price Index (see Table 1). Etcheson (1984) cites, for instance, the
350% rise in food prices between 1950 and 1970, and notes that “Cambodians did very well
between 1954 and 1967 if they simply maintained their standard of living at a stable level;
however, most experienced significant decline” (ibid.). According to Etcheson (1984:19-20)
the erosion of purchasing power was a “prelude to the pandemonium” in the 1970s. Osborne
(1994:215) concludes something similar, by interpreting the 1970 coup d’etat on Sihanouk as
having been a response “to growing dissatisfaction in the army officer corps and among the
urban elite who had come to see Sihanouk’s policies as politically and economically ruinous”.
The problems increased when by 1969 Cambodia was mired in the Vietnam War, and the
Table 1 Leading Economic Indicators Under Sihanouk 1953-1966
National Population PCI*
Income*
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
11.6
13.0
11.5
12.8
14.5
14.3
14.6
16.1
17.6
19.1
21.4
23.2
24.7
26.2
4.2
4.3
4.4
4.5
4.6
4.7
4.8
5.4
5.4
5.7
5.9
6.1
6.1
6.2
2.76
3.02
2.61
2.84
3.15
3.04
3.04
2.98
3.25
3.35
3.62
3.80
4.04
4.22
CPI*
100
108
127
127
127
135
141
151
161
164
174
177
183
181
PP*
2.76
2.79
2.05
2.23
2.48
2.25
2.15
1.97
2.01
2.04
2.08
2.14
2.20
2.33
* National income in millions of 1965 Riels
PCI = Per Capita Income
CPI = Consumer Price Index
PP = Purchasing Power (PCI/CPI)*100
Source: Etcheson (1984:20).
7
economy, which had become war-driven, grew hyperinflationary. In March 1970, the chief of
the army and prime minister Marshall Lon Nol, performed a coup d’etat while Sihanouk was
in Moscow. The Monarchy was dissolved and Cambodia became the “Khmer Republic”. This
marked the end of a period of economic growth in Cambodia. The war effort expanded to
another frontline as well, as the new government also had to fight the increasingly active
Khmer Rouge guerrillas in the province of Siem Rap. The war efforts paralyzed the economy
and the first half of the 1970s saw the degeneration of an economy due to out of control
inflationary speculation and corruption.
In Uganda developments after independence took a similar course. Initially, in the first
national development plan (1961/62-1966/7), the goal was to raise to standard of all
Ugandans, with a view to “eliminating poverty” altogether. This first post-independence plan
was initiated by a World Bank Mission, and based on the assumption that Uganda had a
comparative advantage in the production of coffee and cotton. The production of these
commodities should be sustained. Furthermore, a leading role was assigned to the private
sector to increase production, and create employment and wealth. The government should
apply measures to promote domestic savings and private investment. The intervention of the
public sector in economic development was limited in these first years after independence.
The government’s participation was most visible in the agricultural sector. It included
subsidies on essential agricultural equipment and fertiliser, the expansion of extension
services and research, and export marketing of crops through formation of statutory boards
such as the Coffee Marketing Boards and the Lint Marketing Board were promoted.
In the second development plan (1965-69), there is noted that considerable economic
progress took place as a result of implementing the first national development plan as average
growth in real GDP per capita accelerated from 0.37 to 1,54% per annum (Kasekende &
Atingi-Ego 2008, Table 8.3). But there were also major setbacks: an unsatisfactory expansion
of employment opportunities, low savings and investment rates, and unsuccessful efforts
aimed at reducing income dependence on coffee and cotton. Seeking ways to overcome these
shortcomings, the second Five-Year Development Plan instituted some radical changes to
promote the dominance of the public sector in economic development. For instance, the
government’s focus soon switched to the modern sector employment, which had grown more
slowly than expected. This led in turn to wage legislation, or incomes policy, and the policy
of import substitution. The latter was seen as the best means of economic diversification and
employment creation (Elliot 1973:9). The government undertook tariff protection and
customs refunds on imported raw materials, while key expatriate personnel were issued
temporary work permits on demand. Inherent in the import-substitution strategy was also the
wish to catch up with Kenya, which Uganda and Tanzania felt had enjoyed undue advantage
as commercial centre during British rule (Bigsten and Kayizzi-Mugerwa 2001:15). In
addition, Uganda left the East African Currency Board shared with Tanzania and Kenya; the
Board controlled what there was of monetary policy and helped to keep inflation at bay.
However, the inability for the Uganda government to regulate domestic credit, especially
during the crop-harvest season when invariably there was a shortage of working capital, led in
1966 to the establishment of the Bank of Uganda.
In the beginning the import-substitution regime was not so rigid, which allowed
exports to have large shares in GDP throughout the 1960s, varying from 21% to 26% of GDP
(Bigsten & Kayizzi-Mugerwa:16, Table 1.1). But things radically changed with the 1966
abrogation of the 1962 Constitution and the Move to the Left that was outlined by the 1969
“Common Man’s Charter”. With these changes Uganda embarked on African Socialism that
was sweeping the region at that time (see also Tanzania, Ghana and Zambia). The Move to
the Left culminated in the Nakivubo Announcements which called for nationalization of key
8
industries, thought to be the answer to the low level of private-sector savings and the slow
pace of investment. Instead of looking critically at its own policies, the government blamed
the business community, then mainly of Asian origin, for the low savings and investment
rates. They were accused of “sitting on the fence”, and for “anti-Uganda” transfers of capital
to abroad (Bigsten & Kayizzi-Mugerwa:16). Controls on currency transactions and capital
and property transfers were strengthened, and by 1970 the state was then poised to acquire a
controlling stake in all the major enterprises in the country. By then the military led by Idi
Amin took over government, and continued the efforts directed at nationalization and
Ugandatisation. These efforts culminated in the 1972 Declaration of Economic War by Idi
Amin, expulsing the Asian community from Uganda. While the Economic War was presented
as a way to create an indigenous business and entrepreneurial class, its implementation
resulted in the transfer of economic wealth and power from foreigners, especially of Indian
origin, in favour of mainly of the state and politically connected individuals, rewarding Amin
regime supporters and extending its ranks. In the years after these redistributive policies
would continue, whereby the government increasingly employed terror to eliminate the
obstacles to wealth accumulation by a narrow elite. The major outcomes were disastrous:
emergence of parallel markets, rent-seeking and speculative activities which distorted the
savings-investment relationship, financial repression in the form of negative real interest rates
and over-valued exchange rates, and massive capital and human resource flight (Kasekende &
Antingi-Ego 2008:264-5). Investment levels plumbed dramatically, and GDP growth rates per
annum and real GDP per capita growth rates did as well, being just above zero or negative
(Kasekende and Antingi-Ego: 247, Table 8.2, and Figure 1 above).
Figure 4
Life expectancy at birth (in number of years, selected years)
60,00
Life Expectancy in years
50,00
40,00
Uganda
Cambodia
30,00
20,00
10,00
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
0,00
Year
Source: World Development Indicators
In sum, shortly after independence was gained both Cambodia and Uganda had promising
starts in terms of economic growth and rising GDPs per capita. To some extent this also
improved living conditions for the population as well, as for instance can be seen in the rise in
life expectancy figures in the early period (see Figure 4 above). But for both countries the
9
period of growth was short lived and not sustained. For Cambodia, Ear (1995:63) observes “it
would be easy to characterize these years as ‘relatively good’ given what Cambodia’s
economy underwent in the 1970s and 1980s, but they were actually lost opportunities. In
retrospect, the failure to increase the level of saving and control consumption by the
Cambodian government resulted in two decades of anemic growth”. Most other sources on
this early economic period in Cambodia also proclaim that the 1950s and 1960s could have
been decades of sustained and balanced growth, but that these were at best mediocre years.
Ear (1995:56), again, argues that “the 1960s were perhaps Cambodia’s most promising years.
For it was in this period that economic growth could have taken hold amidst ‘relative’
political stability and military security”. And “the Sihanouk reign was a sad backdrop to a
period that could have otherwise seen an economy priming its agricultural pump” (ibid., 90).
From a Keynesian perspective the spendthrift economy of Cambodia (becoming visible in
large trade balance, government budget, and low saving deposits) could have spurt the
economy, but no adequate measures were taken to direct spending such that it would have
benefited the economy better than it did.
For Uganda, the start was promising but gradually the economic performance
deteriorated as well, though also for Uganda a rise in life expectancy can be observed up to
1972. Several authors blame the change of government policies during the 1960s for the
gradual erosion of economic performance in the late 1960s. Kasekende and Atingi-Ego
(2008) consider 1966 as a turning point when the 1962 Constitution was abrogated. They
refer to Mudoola (1993), who notes that ethnic groups were the most powerful; historical,
social, and political forces in determining the terms of the 1962 constitutional arrangements.
Ethnic balancing characterized the immediate post-independence period because no single
social force was yet strong enough to dictated terms to others. With the abrogation of the
1962 Constitution the delicate balance of power that transcended particularistic interests was
surpassed, which created a polarized political situation in which groups with political
resources seized power and dictated their terms, thus provoking grievances from others. This
situation, as we know now with hindsight, would become a structural feature of Ugandan
society. From 1966 on the economic and political direction was dictated by the relative
strength and influence of different interest groups. This has resulted in rapid changes in policy
and direction after only a short implementation experience; also the period 1962-1970 can be
divided in two periods of four years: one with market friendly policies (1962-1965) and one
with heavy involvement of the public sector (1966-1970), which makes it difficult to judge
which policy served the economy best. While pro-market reformers and neo-institutional
economists are quick to blame the interventionist policies after 1966 for restraining economic
growth in Uganda (see, for example, Kasekende and Atingi-Ego 2008, World Bank 2007,
Bigsten and Kayizzi-Mugerwa 2001), experiences from elsewhere, including southeast Asia
(Vietnam, Indonesia), the East Asian countries, and the industrialized countries in Western
Europe and North America, suggest that interventionist policies may well be a necessary
condition for realizing economic take-off and sustained economic growth (see Chang 2002
and 2006, Henley etc.). But in the case of Uganda we will never know for this early period
what would actually have worked best. The first, market friendly period was too short to
assess its merits, and the period in which more intervention took place rapidly evolved into a
situation where state intervention became equal to terror and opportunism. What can be
observed is that the Ugandan economy more or less remained the same as it was inherited
from the British ruler, with a high dependence on the exports of agricultural commodities and
an institutional framework that was designed to accommodate these exports. As Van
Zwanenberg (1975) observes, when discussing the early post/independent history of Uganda
and Kenya, the biggest challenge of the new independents governments was perhaps to break
through the colonial economic structures that had been created by the British, but the new
10
governments did not tackle this challenge adequately or did not want to tackle this problem
for political reasons. A topic that may ask for more attention when discussing early postindependent economic history of Uganda.
3. The period 1987-2008: rebound effects and resource exploitation
In both countries the first growth period was followed by a period of authoritarian rule and
civil strife, which greatly disrupted economic life and undermined many of the foundations
for national development. For Uganda, this period lasted for 15 years, starting with the
destructive rule of General Idi Amin between 1971 and 1979, followed by the equally
destructive government of president Milton Obote, ending in 1986, when Yoweri Museveni’s
National Resistance Army (NRA) took power.7 For Cambodia, the problems started in 1970
when under Marshall Lon Nol the country rapidly descended into a civil war, followed by the
traumatic period of ‘auto-genocide’ under the Khmer Rouge (1975-1978). The Vietnamese
occupation between 1978 and 1991 triggered another, second more low-intensity albeit still
massively debilitating civil war. Peace was restored after the Paris Agreements of 1991, and a
coalition government was formed in 1993, headed by prince Ranariddh. The period of war
and civil strife was disastrous for the economy in both countries. In both economies real GDP
per capita plumped below pre-independence levels and life expectancy rates declined as well
(see Figures 1 and 4) due to hunger, violence and large scale killings, which in Cambodia
actually meant genocide. When finally peace was established, the new leaders were
confronted with a physical infrastructure that was completely destroyed, with non-functioning
government institutions, widespread corruption, non-existent educational systems,
traumatized populations, collapsed product and financial markets, and government finances in
complete disarray. The whole period had been characterized by growth de-accelerations and
negative growth rates, with the exception of a short upheaval in Uganda in the period 19801983 when Milton Obote’s second government cashed its war dividend after the disastrous
and traumatic Amin period.
The new government leaders that came up after peace was restored have shown a
remarkable political resilience so far. In Uganda, Yoweri Museveni has been president of
Uganda since he took power in 1986, first under a ‘no-party’ system and since 2006 under a
multiparty system.8 In Cambodia, Hun Sen started in 1993 as second prime minister besides
first prime minister Prince Ranaridhh. This coalition fell apart in 1997 when Hun Sen, who
was also leader of the Cambodian’s People’s Party (CPP), organized a violent takeover to
replace prince Ranariddh. Hun Sen has been prime minister of several coalition governments
since then, winning two more national elections with his CPP. Though the several elections
which were held in both countries in the last 15-20 years do suggest a form of
democratization, both leaders have become known for their authoritarian style of ruling.
Nevertheless, both Uganda and Cambodia have embarked on a road of economic recovery,
with high growth rates and remarkable reductions in poverty headcounts. While both
countries have achieved comparable economic results (see this section further below), the
assessment by observers of the economic performance in the post-conflict era differs
7
It should be noted for Uganda that civil strife continued in the northern districts of the country throughout the
1990s up to 2007, where the raids by the Lord Resistance Army (LRA) continued to destroy the economic and
social fabrics of rural communities, and caused massive displacement of people who had to live under very poor
conditions in camps set up by the Ugandan government.
8
Under president Museveni Uganda became a ‘no-party state’, whereby every citizen was supposed to be
member of the National Resistance Movement (NRM) by birth. Candidates for parliamentary, presidential and
local elections could only stand for themselves, not in name of a political party. In 2005 the ban on political
parties was lifted and in 2006 highly disputed multiparty elections took place for the first time since 1986. These
elections were won by president Museveni’s NRM, though in parliament other parties took seat as well.
11
remarkably between the two countries. Where in both academic literature and policy circles
Uganda has been widely hailed as the new ‘African Lion’, and because of this became an
African donor darling together with countries like Ghana, Ethiopia and Mozambique,
Cambodia has often been portrayed as politically unstable and economically
underperforming. The difference of opinion can only be explained by looking at the regions in
which these two countries are situated. For African standards Uganda’s economy has done
extremely well, for East and Southeast Asian standards the Cambodian economy has
underperformed though growth and poverty reduction figures at first sight are at least at the
level of Uganda. The reasons for the relative under- and over performance can be many:
differences in economic policies and development orientation, strength or weakness of
political institutions, external influences, geographical location, and so on.
In the remainder of this section I will explore some of the main drivers behind the
growth episodes of Cambodia and Uganda and make a first rudimentary assessment on how
sustained the economic performance of the last 15-20 years actually is.
Reform policies and economic growth
Figures 5 and 6 present data on the annual GDP growth rates in Cambodia and Uganda in the
post-conflict period. As can be seen, growth performance in both countries has been steady,
with growth rates staying above 4% per annum, a few exceptions left. The steady growth has
also translated in a steady rising GDP per capita (see Figure 1 in this paper), and
improvements in life expectancy rates (see Figure 4 above), the latter in particular in
Cambodia. Life expectancy rates in Uganda declined in the mid-nineties because of the
HIV/Aids pandemic, which was at its height at that time. Due to effective campaigns Uganda
has managed to reduce the HIV/Aids infection and mortality rates, which paid off in the late
1990s and 2000s in terms of a rise in life expectancy. Figures from the 1990s and 2000s,
presented in Table 2, also suggest that poverty rates have substantially been reduced. In
Cambodia the poverty headcount ratio (% of the population that lives on 1 US Dollar per day
or less) has been estimated to have fallen from somewhere between 45 and 50% in 1994
(back-projected figures) to 35 % in 2004 (see World Bank 2006:17). Poverty rates have fallen
both in rural and urban areas, though faster in the urban areas than in the rural areas (urban:
from 37% to 21 %, rural: from 43% to 34%). In Uganda national poverty measured by the
headcount declined from 55.7% in 1992/93 to 33.8 in 1999/2000, to rise again to 37.7% in
2002/2003. Over the same period, urban figures show a decline from 27.6% to 12.2%, and for
rural areas poverty headcount declined from 59.7% to 41.7% (all figures derived from Kappel
et al. 2005). But also in urban and rural areas the poverty headcount figures where lowest in
1999/2000, and slightly gave risen in the period following after, which shows that poverty
reduction in Uganda has not been a steady but rather volatile process (see also Appleton
2001).
What is actually remarkable about the growth picture that is sketched above is the long
time period over which Cambodia and Uganda have realized high economic growth rates.
Most post-conflict countries tend to rebound with peace. But most post-conflict rebounds
typically run their course within six years (Collier & Hoeffler 2002). And most growth
episodes, however they were started, tend to run out within eight years or so, having run-up
against a binding constraint (Hausmann et al. 2005a). Uganda’s and Cambodia’s growth
spurts are still running, for almost twice as long as would be regarded as ‘normal’. This may
indicate that something kept the rebound alive, and a main question is then which factors
contributed to this? While adherents of neo-classical theory would be quick to emphasize
three broad principles: openness, sound money, and property rights, other views can be heard
as well. Johnson et al. (2007), for instance, argue that there is not yet a unified theory of
12
sustained growth and that what is associated with growth accelerations is not necessarily what
keeps growth going. Up to date economists have explored
Figure 5 GDP Growth Rates Uganda 1984-2007 (constant prices)
12,0
10,0
8,0
Growth rate (%)
6,0
4,0
2,0
Uganda
0,0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-2,0
-4,0
-6,0
-8,0
Year
Source: World Economic Outlook Database, October 2008, IMF
Figure 6 GDP Growth Rates Cambodia 1986-2007 (constant prices)
24,0
22,0
20,0
18,0
GDP Growth Rate (%)
16,0
14,0
12,0
10,0
8,0
6,0
4,0
2,0
0,0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200
-2,0
-4,0
Year
Source: Data derived from World Economic Outlook Database October 2008, IMF
(http://www.imf.org/external/pubs/ft/weo/2008/02/weodata/index.aspx)
13
some plausible factors that are associated with growth decelerations including weak economic
and political institutions, conflict or civil strife, bad macroeconomic policies, inadequate
education, poor health, and disadvantageous geographical location, but it is not by definition
true that the opposite of these factors will create and sustain growth. Hausmann et al.
(2005a:305), discussing what factors cause growth accelerations, have found that in some
cases growth accelerations tend to be correlated with increases in investment and trade, and
with real exchange rate depreciations, and that political-regime changes are statistically
significant predictors of growth accelerations. But they also conclude that: “.., perhaps most
importantly, we find that growth accelerations tend to be highly unpredictable: the vast
majority of growth accelerations are unrelated to standard determinants such as political
change and economic reform, and most instances of economic reform do not produce growth
accelerations.”
But it would be interesting to see whether the last observation is also valid in case of
Uganda and Cambodia. To start with Uganda, the reform process in 1986 was initially marked
by rejection of market-based reforms in favour of continued controls and regulation, followed
by reluctant implementation of reforms between 1987 and 1992. This first phase of reforms –
starting in 1987 under an Economic Reform Programme - was directed at creating macroeconomic stability, and included currency reform, devaluations, liberalization of domestic
prices, reduction of excessive government expenditure, and eventual conversion to floating
exchange rate regime by 1993. Following this first generation of reforms, Uganda’s
authorities embarked upon a sequenced package of structural reform policies and investments
designed to free up markets and create price incentives, stimulate private investment, and
encourage competition. Marketing boards were abolished and the financial sector was
liberalized. Privatization focused initially on banks and then on public enterprises, and
eventually in 1998 on utilities, including telecom and electricity sectors. The early reforms
were rewarded by an increase in aid inflows and return of flight capital, followed by an
increase in Foreign Direct Investment, particularly following the telecommunications
privatization. The decisions to reform mainly arose from a consultative conference in 1989
where all stakeholders in the economy were invited, and whose outcome was biased in favour
of the adoption of market-oriented policies and private sector-led growth (Kasekende and
Atingi-Ego:256-7). The IMF and World Bank were invited by the government of Uganda to
assist it in designing a programme based on the recommendations of the consultative forum.9
Among the reforms that were proposed the radical liberalization of the foreign exchange
market system was by internal observers viewed as a key reform (World Bank 2007:5,
Kasekende and Atingi-Ego 2008:256). Indeed, a strong correlation can be found in Uganda
between the decision to depreciate the real exchange rate and the growth acceleration which
ensued in the following 8/10 years (World Bank 2007:4 , Figure 2.1). Growth theory also
suggests that sustained real exchange rate depreciations increase the relative profitability of
investing in tradables, and act in second-best fashion to alleviate the economic cost of
institutional and market failures, which disproportionately affect tradable economic activities.
They speed up structural change in the direction that promotes growth. That is why episodes
of undervaluation are strongly associated with higher economic growth (Rodrik 2008).
But other factors, besides prudent macroeconomic policies, played an important role
as well in the growth acceleration during the 1990s. Part of the success story can also be
9
There is considerable discussion by observers why the new government suddenly changed its economic
policies so drastically in the late 1980s. Internal discussions and lack of consensus within the government on
whether Uganda should be an open or a closed economy (see Holmgren et al. 2002), which made sudden
switches more likely, and the drive to strengthen the weak domestic power base of the government by seeking
alliances with powerful and generous donors (Mwenda and Tangri 2005) are some of the reasons that are
brought forward in existing literature.
14
traced to a rebound to past levels of economic activity, it is only by the late 1990s that the
economy just recovered to its 1971 real GDP per capita (see figure 1 in this paper). Some of
the rebound was good luck as international coffee prices were buoyant in the early 1990s,
resulting in an improvement of Uganda´s terms of trade by 100 percent between 1992 and
1995 (World Bank 2007:4). Some was due to the resumption of trading. Also the effect of the
demand-stimulus of large scale donor-financed rehabilitation in the post-conflict period
should not be underestimated. Foreign aid on average has made up 14% of GDP and nearly
40-50% of the current expenditures of government budget. This all at least suggests that the
determinants of growth acceleration in Uganda in the 1990s have partly been idiosyncratic,
and growth in the 1990s has not strictly correlated with major changes in economic policies
and institutional arrangements, as many of Uganda´s donors strongly proclaim. This could be
an obvious area for further research. It also suggests that achieving rapid growth in the
medium term is not something that is tremendously difficult to achieve, and can be caused by
small changes in internal or external conditions.
Reforms in Uganda continued in the 2000s, with a major landmark in 1997 when the
focus of reforms switched to poverty reduction. With its Poverty Eradication Action Plan
(PEAP) the Ugandan government had written a Poverty Reduction Strategy Paper avant la
lettre , and Uganda was also the first country worldwide to receive aid and debt relief on base
of the PEAP. The substantial scale up of foreign aid flows which came after the introduction
of the PEAP went in particular to the education and health sectors for which sector
investments plans were made. Infrastructure (in particular rural feeder roads), agriculture and
justice and law were other sectors for which investment plans were designed. Part of the
reform emphasis in the 2000s also switched - in line with shifting international donor
priorities - to issues of ´good governance´ and ´institutional development´, and aimed at
improving public service delivery, tightening public expenditure and procurement systems,
and building broader systems of accountability, law and order.
The figures from Figure 5 suggests that the trend of growth in Uganda has slowed
down a bit. Average real GDP growth slowed down to 5.5 percent since 1999, compare to 6.9
in the 1990s. This is still higher than the 3.3 percent recorded for Sub-Saharan Africa but
Uganda´s exceptionally high population growth coupled with a high dependency ratio, means
it translated into per capita income growth of just 1.8 percent, and that growth rate is below
the Low Income Countries average since 2000. The slowdown of economic growth has
revived the discussion on the market orientation of the Ugandan economy. But if it is argued
that macroeconomic policies only partly contributed to the successes of the 1990s,
macroeconomic policies cannot be fully responsible for a slowdown as well. Again,
idiosyncratic events had their share, and now in a negative sense. Part of the slowdown can be
explained by adverse terms of trade. In fact, the terms of trade deteriorated by about 40
percent between 1998/99 and 2003/04, with nearly all of Uganda´s main exports - traditional
and non-traditional - suffering lumps in international prices (World Bank 2007:7). This
coincided with escalating prices for petroleum just as the intensity of petroleum use in
Uganda was increasing. Moreover, Uganda´s economy weathered a banking crisis and a
severe drought, and currently faces a power crisis. In 1998, the State owned Uganda
Commercial Bank was closed, restructured and sold. Lending by the South African bank
Stanbic, the new owner, only resumed in 2004, leaving a credit crunch at the start of the
century. In 1999/2000 and in 2002/03 Uganda suffered severe droughts, which affected food
crop output and drove up food prices. Still though one could argue that Uganda’s economic
macro-economic performance has been robust in the first half of the 2000s, also taking into
account the problems of insecurity and conflict in the Northern districts of the country that
continued to plague the country.
15
For Cambodia, 1991 is generally considered as the year when economic growth took off (see
also Figure 6). In 1991, peace was restored and this culminated in 1993, when the first postconflict collation government was installed after elections. As Figure 6 above shows GDP
growth rates have been high since then, also translating in rising life expectancy rates and
GDP per capita growth. Much more than Uganda, Cambodia has suffered from war and civil
strife. The collectivization period under the Khmer Rouge between 1975 and 1979, the civil
war that followed under a Vietnamese controlled government, and the socialist planning
economy that was adopted then, had literally and figuratively drained all blood from the
Cambodian people and its economy. Still, Hughes (2003:19) points out that the foundations of
economic growth have been laid before the 1993 elections: “Significantly, for Western
writings of Cambodia’s history, the processes for economic change began before the arrival of
the UN (in 1991, AL) and its cohorts of foreign workers.” In 1989, a raft of economic reforms
were introduced, which recognized the de facto gradual privatization of the economy since the
early 1980s (Hughes 2003:31). The 1989 reforms consisted of a change in land tenure policy
and farm-level structure of production, and reduction and elimination of state controls on
prices, imports and movements of goods to create a unified and market-determined price
structure and to legalize the black market in foreign goods. Agricultural taxes and forced state
purchases were officially abandoned. At the same time, state-owned enterprises were awarded
autonomy and privatization processes were set up. Hughes (2003:32) notes that the immediate
impact of economic reform in 1989 was a dramatic increase in economic activity.
In fact, the 1993 government in Cambodia was confronted with the same wide
spectrum of choices because of being left with a legacy of weak economic policies and
economic structures. After years of devastation and chaos, the basic intentions of the 1993
government were to move Cambodia towards democracy and prosperity. The reform of the
economic system embodied a continuance of the market-oriented policies that had been
started in 1989. As the most immediate tasks, like in Uganda, the government saw restoring
financial stability, promoting investment for rehabilitation and reconstruction, and reforming
the central institutions of macro-economic management (CDRI 2001). In 1994, a mediumterm adjustment and reform programme intended to restore macro-economic stability was
launched. Three major reforms stand out, which also show much similarities with Uganda:
inflation stabilisation, exchange rate reforms, and fiscal reforms. According to CDRI
(2001:8), “inflation stabilisation was the most successful action of the government during the
reofmr period”. Inflation was brought back to single digits and have been under control since
1994. In this the government was helped by the high degree of dollarisation of the Cambodian
economy, which is helpful in containing inflation, and the government made relatively limited
use of bank financing to make up budget shortfalls, which helped to maintain stability of the
riel against the US dollar. Since 1993, Cambodia has also pursued a managed floating
exchange rate policy, and has relied on tight financial policies to ensure stability in the foreign
exchange market (for instance by avoiding bank financing of budget deficits and using dollar
reserves by the National Bank of Cambodia). This ensured a relatively stable exchange rate of
the riel against the US Dollar and the main currencies in the region, the Thai baht and the
Vietnamese dong. Prudent fiscal policy was seen as a key tool in economic management and
the purpose was also to develop a fiscal structure that generates the domestic resources
required for increased public spending in priority social and infrastructure areas. Revenues
increased through increased forestry royalties, improved customs administration, and the
introduction of a value-added tax (VAT), but generally the tax structure continued to be weak
caused by weak governance and lack of a clear fiscal policy (CDRI 2001:9). Still, Cambodia
has to rely heavily, like Uganda, on foreign aid to meet targets in public investment and social
development. Another priority of the government was to integrate Cambodia again in regional
and global political and economic forums, to resolve its international isolation in the previous
16
20 years. Cambodia joined the Association of Southeast Asian Nations (ASEAN) in ????? and
in 2004 it joined the World Trade Organisation as its 148th member.
In 1994 the Cambodian government presented a comprehensive development plan –
The Rectangular Strategy for Growth, Employment, Equity and Efficiency in Cambodia – in
which its priorities were reiterated. In this plan four ‘growth rectangles’ are identified: (1)
enhancement of agricultural sector; (2) private sector growth and employment; (3) continued
rehabilitation and construction of physical infrastructure; and (4) capacity building and human
resource development. This plan formed also the base for Cambodia’s Poverty Reduction
Strategy paper which – in turn – gave access to increasing amounts of donor money and debt
relief as well. In the rectangular strategy the priorities of the international donor community
are well reflected as ‘good governance’ is referred to as the cornerstone of the Rectangular
Strategy (Royal Government of Cambodia 2004:5). Where in first instance, like in Uganda,
the focus was on creating macro-economic stability, the agenda gradually evolved into a
development oriented course, in which issues as governance and health and education
received more priority as well (see also Coe et al. 2006 for a good overview).
In terms of economic growth and GDP per capita growth all went well for Cambodia
since 1993. There was a setback in 1997 and 1998 because of the East Asian financial crisis
and a new eruption of violence and civil strife in Cambodia when Hun Sen violently took over
government from Prince Ranariddh. The latter had more impact on economic activity than the
Asian crisis, because the dollarization of the Cambodian economy proved to be an asset
during this crisis. The Cambodian economy was less severely hit than surrounding economies.
To what extent the economic policies put in place have triggered economic growth is also for
Cambodia an ingredient for discussion. The World Bank (2006:56), for instance, conclude
that “the main determinants of economic growth since the mid-1990s have been a relatively
stable macroeconomic environment, including favourable external conditions and markets,
generally prudent domestic financial policies, and the creation of critical market institutions.”
Though macro-economic stability will undoubtedly have contributed to increased economic
activity, also Cambodia had a rebound effect after war and civil strife. As the IMF (2006:6)
concludes “most work up to 1997 were somewhat in the nature of rehabilitation or "BandAid" efforts, serious rebuilding work commenced in 1998. While the 'hardware' by way of
building physical infrastructure has been proceeding, the 'software' of changing economic and
legal systems, reinforcing social capital and institutional development, is by its very nature
time consuming”. Coe et al. (2006:1) conclude something similar by stating that “only after
the 1998 national elections was the resulting coalition government able to start pursuing more
coordinated reforms, albeit with mixed results”. And also favourable external developments
contributed to the relatively strong macroeconomic performance. In 1996, the effective
average U.S. tariff rate for Garments produced in Cambodia was reduced from 50-70 percent
to 10-20 percent under the bilateral Agreement on Textiles and Clothing. Exports to the
United States soared from nearly zero in 1995 to more than 1 billion US Dollars in 2003,
almost 70 percent of total garment exports (Coe et al. 2006:2). In addition, large aid inflows,
averaging 12 percent of GDP, helped finance domestic investments and fuelled construction
activities. And finally, the regained political stability in the late 1990s eliminated an important
obstacle to tourism in Cambodia, a country richly endowed with natural and historic
attractions (among others, the ancient Hindu temple complex Angkor Wat from the 12th
century) leading to a sharp increase in the number of tourists. In sum, also in the case of
Cambodia idiosyncratic events seem to have contributed a lot to the economic performance in
the post-conflict period. This observation is, however, based on a superficial investigation of
some macroeconomic trends. More insight in the growth performance and its sustainability of
the two countries can be obtained by looking at dynamics at sector level and processes of
structural transformation in the economy. This will be done in the remainder of this section.
17
Drivers of economic growth and structural transformation
Rapid growth and sustained economic growth in the most successful developing countries has
involved a process of late industrialization in which the production structure has shifted from
the primary sector to manufacturing, alongside a progressive move from less to more
technology- and capital intensive activities both within and across sectors. The engine of this
process of structural change and productivity growth has been a rapid pace of capital
accumulation (Akyüz and Gore 2001:266-7). Rapid economic growth in successful cases has
been underpinned by rising rates of savings, investment and exports, linked together in a
virtuous circle. What can be said about these issues in the cases of Uganda and Cambodia?
Tables 2 and 3 present some figures that will be discussed in the paragraphs to follow.
Table 2
Uganda: Sectoral Composition and Growth of GDP (1990-2005)
Supply of GDP*
Growth rates
(%)
90-99 00-05
6.3
5.5
Sectoral contribution to
Sectoral shares in
GDP growth (%)
nominal GDP (%)
1990-1999 2000-2005 1990-1999 2000-2005
6.3
5.5
100.0
100.0
Agriculture
3.9
3.3
1.8
1.3
46.4
33.8
Industry
Manufacturing
Construction
Gas,electricity
Mining, quarrying
10.0
12.3
8.3
7.6
34.1
7.0
5.6
8.3
6.5
8.5
1.8
0.8
0.8
0.1
0.1
1.6
0.5
0.9
0.l
0.1
18.5
7.3
9.6
1.2
0.4
24.6
9.4
13.0
1.4
0.8
Services
7.8
6.8
2.7
2.6
35.1
41.6
Demand of GDP**
6.9
5.5
6.9
5.5
100.0
100.0
Domestic absorption
7.5
5.3
7.8
5.8
112.4
113.6
Consumption
Public
Private
7.3
7.6
7.3
5.1
5.1
5.1
6.4
0.9
5.5
4.7
0.6
4.1
96.0
12.1
83.9
93.2
14.4
78.8
Investment
Public
Private
Change in stocks
9.0
4.0
12.7
21.2
6.6
-1.2
9.4
18.5
1.3
0.1
1.2
0.0
1.0
-0.1
1.1
0.1
16.5
5.5
10.9
0.0
20.5
5.3
14.5
0.4
External absorption
Exports
Imports
5.5
12.7
7.4
0.4
7.2
4.3
0.3
1.0
1.3
0.0
0.8
0.8
-12.4
10.4
22.9
-13.6
12.0
25.6
* GDP at factor cost
** GDP at market price
Source: Uganda Bureau of Statistics
18
If we look at the supply side in Uganda there was a rapid transformation in sector production
between 1990 and 1999. Industry was the fastest growing sector, led by construction (foreign
aid) and manufacturing, which together accounted for 1.8 percentage points of average annual
GDP growth of 6.3 percent. Mining and quarrying had an impressive growth rate, but the
sector is amll and therefore its contribution to GDP is low.10 Services were the principal
driver of overall growth in value added however, providing 2.7% percentage points to GDP
growth, with transport and communications (mobile phone companies), hotels and restaurants
and general government (foreign aid) recording strong growth. Agriculture grew at a rate of
3.9% per annum between 1990 and 1999, contributing 1.8 percentage points to grow. The
structural transformation slowed down over the period 2000-2005. Growth in agriculture
decelerated to 3.3 percent and its contribution to GDP was 1.3 percentage points. Industry
decelerated as well, contributing 1.6 percentage point to GDP. The services sector remained
the biggest source of GDP growth, decelerating only modestly to 6.8% and a contribution to
GDP of 2.6 percentage points. The slow down in structural transformation has led some
commentators to suggest that either Uganda has reached the limits of its manufacturing
recovery, or that industry needs incentives in order for firms to invest.
If we look into more detail in the sector performance, agriculture is still then most
important livelihood source for most of the population. Within agriculture food crops (maize,
green bananas, cassava, sweet potato, sorghum and millet) have traditionally been the
dominant sub-sector, followed by industrial crops (coffee, cotton, tea and tobacco). Food
crops are also still the main contributor to growth, though with the rise in the world price of
coffee in the 1990s (which peaked in 1997) the significance of the industrial crops for growth
increased significantly. Since 1997 the contribution of industrial crops has declined again,
due to declining coffee prices and production suffering from coffee wilt disease. Though
Uganda agriculture is diversified, the aggregate composition of output has hardly changed
over the years. In the period 1990-97 agricultural production increased significantly and there
are strong indications that the economic reforms of the 1990s benefited the performance of
the agricultural sector (see, for example, Dijkstra and Van Donge 2001, Opolot and Kuteesa
2006). The main driver behind output growth in food crops has been area expansion, which
positive effect was partly offset by declining or stagnant yields for all food crops, -2.7% over
1998-1997 (World Bank 2007:57, Table 2-4), except for matooke. For industrial crops area
expansion was also a main driver, but yields also increased at a high growth rate, 8.6%
(World Bank 2007:57, Table 2-4). In particular cotton and tea did very well.
In the period 1998-2004 the overall performance of the agricultural sector was modest
compared with the previous period. On the domestic front, unfavourable weather conditions
(prolonged drought in 2001/02) led to poor performance of the agricultural sector. Further
more, poor access to productive assets, especially credit and land, constrained performance of
firms and individuals engaged in agriculture. Despite increases in farm gate prices of
agricultural prices because of liberalization, the production incentive structure favoured nonfarm activities compared to agriculture. This partly explains the low growth of the agricultural
sector during the past decade (see Okidi et al. 2004). Still, growth in food output has been a
major source of growth, and output growth was realized in a broad range of crops (cassava,
rice, maize, irish potato and oilseeds). Also yields turned positive to a 1.3% growth, though
this is still low. Cassava was a major contributor through the introduction of disease resistant
varieties spreading quickly and widely. Estimates show that half of output growth could be
related area expansion and the other half to productivity gains (World Bank 2007:59).
10
The remarkable growth figure on mining are mainly the result of Uganda’s involvement in the civil war in the
Democratic Republic of Congo, where Uganda took advantage of the mineral resources that were illegally
exploited by the military during the war period.
19
The agricultural sector is not only the main provider of employment and livelihood,
but also a main driving force behind Uganda’s exports. Traditional export products have been
since colonial times coffee, cotton and tea, but in the last 20 years agricultural exports have
become increasingly diversified. Notably fish and fish products, and high value exports
products like flowers, vanilla, and other horticultural products have become part of Uganda’s
exports. The output of these non-traditional export crops is booming, though its contribution
to overall agricultural GDP is still modest. But like the garment industry in Cambodia (see
below) in particular the flower sector is rather an enclave industry with little backward
linkages in the economy, except for employing cheap rural wage labour. The dependence on
agricultural products for export earnings brings its own vulnerabilities in terms of weather
variability and high volatile prices in output markets. This has been shown for coffee with
declining prices in the 2000s, and several periods of drought during the early 2000s).
Whether the agricultural can contribute to economic growth in the near future needs to
be seen, because the sector is plagued with many problems. Most of agricultural production in
Uganda is smallholder agriculture, whereby access to land is still realized mostly through
indigenous systems in which membership of the local community is primary source of landuse rights and farm households have multiple livelihoods, combining subsistence production,
cash crop (food or non-food) production, rural industry and (casual) wage labour. Most of
agriculture is rain-fed with double cropping in most agro-climatic zones and no irrigation.
Population pressure, which will only increase in the coming 25 year given high population
growth in Uganda, and lack of effective land management cause widespread land
degradation, up to 55 % of total cultivatable land is eroded. Pender et al. (2004: 768) note that
the rate of soil nutrition depletion in Uganda is amongst the highest in Sub-Saharan Africa,
and that soil erosion is a serious problem in highland areas. As already noted, low
productivity (both per labour and per area unit) is a severe problem. The use of modern inputs
has grown since 1995, but it remains among the lowest in the world (World Bank 2007:30).
The intensity of fertilizer use in Uganda is less than 10 percent of even the average intensity
for Africa, which itself is low. There is a strong need to increase productivity in agriculture.
With a projected population exceeding 100 million people in the next 40 years (from 30
million today) the future generations will have to be fed and will also have to leave the land to
avoid a downward cycle of soil infertility, declining productivity and increasing subsistence.
Part of the employment problems in the agricultural sector could be captured by the
services sector, which has been the main driver of growth in Uganda. Since 2004 it has the
largest share in GDP and in contribution to GDP growth. A substantial part of the services
sector are community services, which in 2002/03 accounted for 19.1% of GDP, grew at an
average rate of 6.8% during the fifteen years from 1987 (Okidi et al. 2004). This was slightly
higher than the average GDP growth rate of 6.3%. Community services include education,
health and general government. The growth of community services is partly associated with
increased public sector spending on these sectors, supported with donor funding. Throughout
the 1990s and in the current decade, donors have given substantial support to education and
health. Thus, public sector spending on community services, which donor support made
possible, explains a significant part of Uganda’s high economic growth between 1987 and
2003. The transport and communication sector recorded high growth with air and support
services driving this growth. The road sub-sector received substantial donor support during
the period under study. And the telecommunications sub-sector has grown in the recent past
without donor support. The railway was the worst performing transport sub-sector, which
shrank by 3.5% in 92/93, 5.9% in 95/96, 22.6% in 96/97, and 12.6% in 97/98 mainly due to
mismanagement.
Above brief descriptions suggest that Uganda’s economic growth has for a large part
been driven mainly by donor support, and to some extent by increased private sector
20
investment especially in construction. Therewith, the growth of community services, seems to
have been a key driver of Uganda’s GDP growth between 1987 and today.
For Cambodia, Table 3 below shows that there has been a major shift in economic activity
from agriculture to industry, and industry has become the main driver of economic growth in
2004, followed by services and agriculture. But the economic growth has a very narrow base
comprising mainly the garment, services (tourism) and construction sectors, and to a much
more limited extent, the agricultural sector in which the production of paddy rice and
increasingly fish dominate. The latter is surprising as around 85% of population still lives in
the rural areas and 70% still finds employment in agriculture. Moreover, the impressive
performance of the two main engines (garments and tourism) owed more to fortuitous
circumstances and narrowly-based ‘enclaved-type’ of development, than to effective
economy-wide-growth-generating economic policies and management by an effective and
responsive state (World Bank 2006:57). In 2005, garments accounted for 80.4% of Camodia’s
total exports, making Cambodia one of the countries in the world most heavily dependent
upon a single export commodity, with the potential vulnerability it entails.
Table 3
Cambodia: Sources of growth by main economic activity, 1994-2004
Share of GDP
1994
2004
19942004
Annual % Change
1994 2004 19942004
Contr. to GDP
1994 2004 19942004
GDP
100.0
100.0
100.0
9.2
7.7
7.1
100
100
100
Agriculture
45.9
30.9
38.8
9.9
-2.0
3.4
49.3
-8.7
20.2
Crops
Livestock
Fisheries
Forestry
17.7
7.9
13.0
7.3
15.0
5.0
8.8
2.0
16.8
6.5
11.5
4.0
2.7
-2.9
4.1
87.5
-3.4
4.3
-3.3
0.2
5.2
1.8
3.0
3.9
5.5
-2.8
6.0
40.5
-7.4
2.9
-4.2
0.1
11.3
2.2
6.2
0.5
13.6
28.9
20.1
14.2
16.1
15.4
20.0
56.3
41.1
0.2
8.0
0.9
5.2
0.3
5.0
0.3
21.8
16.3
3.3
0.5
6.4
0.2
14.4
7.5
4.7
0.4
5.1
29.2
9.0
25.1
8.2
8.6
23.4
9.1
17.4
24.9
-3.4
4.6
13.2
10.8
17.4
43.6
2.7
11.9
11.9
0.7
7.9
2.0
4.7
0.3
11.2
0.3
45.3
45.6
-1.6
0.3
10.4
0.3
33.8
28.9
2.4
0.7
6.4
35.4
34.4
36.0
0.6
9.2
6.1
2.6
40.7
31.3
Industry
Mining
Manufacturing
Garments
Agri-industry
Electricity/Gas
Construction
Services
Source: National Institute of Statistics
If we look in more detail into the sector some other issues rise as well. Agricultural
growth has on average been 3.4% over de period 1994-2004, but this growth was very volatile
due to political unrest in 1997, the financial crisis in 1997, and weather conditions (severe
floods in 2000, and drought in 2004 and 2005). Within the agricultural sector the production
of rice paddy remained by far the predominant activity as can be seen in Table 4 below,
21
though maize and cassava production has grown over the years. Both crops are linked to
upcoming agri-industries in Cambodia: the increased maize production is mainly a response
to the rising poultry production within the Thai livestock sub-sector, the rise in cassava
production (39% between 1994 and 2005) is a response to the starch industry that is coming
up in Vietnam.
Table 4 Composition of agriculture (share of gross value added in agriculture)
Paddy
Vegetables
Maize
Rubber
Cassava
Livestock/poultry
Fisheries
Forestry and Logging
1994
54.4
12.6
1.4
4.8
1.7
13.7
29.5
16.1
2003
47.6
7.8
5.7
9.4
4.6
16.1
31.4
5.6
Forestry has declined sharply between 1994 and 2004. The sector had an exceptional growth
and performance between 1994 and 1997, but since then the sector has contracted sharply,
6though value added in forestry could be underestimated due to illegal logging (CDRI
2008:55). The main reasons for this contraction include the moratorium on commercial
logging, deforestation and poor management of concessions. The relatively low contribution
of agriculture to economic growth has much to do with continuing low productivity levels in
agriculture both in terms of land and labour. Binding constraints include insecurity of land
tenure, poor irrigation and lack of other critical infrastructure, weak human capital, an the lack
of access to, or high cost of, capital. The contribution of agriculture to overall economic
growth has come largely through accumulation of factors of production – land and labour – as
part of extensive growth of activity, with only modest improvement in productivity levels
(mainly in rice and maize production) from very low levels. In Cambodia, only 7 percent of
arable land is irrigated, well below the 20-30 range in most neighbouring countries, and 87 %
of the rural households has two hectare or less. Thus, most of agriculture is dependent on the
vagaries of rainfall, with attendant higher risks to the sue of purchased inputs for small
farmers, and reduced capacity to undertake crop activities during the dry season. Total
investment (public and private) in agriculture over the last decade have been dismal, about
0.5% of total GDP. The main vehicles for such investments were three ministries (agriculture,
water, rural development), while the share of foreign aid going to the agricultural sector since
1999 has only be in the 8-10% range (World Bank 2006:63). The World Bank (2006)
concludes that if agricultural growth were sustained at 4% per annum, Cambodia would
achieve its Millennium Development Goals of halving poverty in 2015.
Within industry the performance of the production of garments has been remarkable.
As mentioned above, virtually all garment output was exported to the preferential US and
European Union markets. A quarter million people are employed in this industry. 85% are
women from rural areas, who remit part of their salaries back to their families. While,
Cambodians provide the labour, the owners of the factories are mostly from other countries.
Under the Multifibre Agreement (MFA) quotas were imposed by governments of developed
countries in imports of textiles and garments from the increasingly competitive garment
companies in developing countries. As a by-product of this arrangement, many of the wellestablished garment companies in the developing countries, mostly owned by Chinese
nationals, began shifting some of the operations to other developing countries with abundant
22
labour, including Cambodia in the mid-1990s. By end 2004, nearly 75% of the owners of the
companies came from the Greater China region, South Korea, Malaysia, and Singapore, and
these owners brought expertise, capital and considerable experience. Only 17% of the owners
are Cambodian, and most of them are in partnership with the fore mentioned groups. The
garment industry has mainly a “off-shore outlet” nature (World Bank 2006, CDRI 2008).
Decisions on production levels and marketing are taken outside Cambodia, and the production
in Cambodia relies on imported textile and other raw materials with limited backward
linkages to a few informal and small-scale sub-contractors. Then preferential treatment of
garments from Cambodia is also due to be ended (agreements expire in 2008), and unless
Cambodia is able to improve its competitiveness, especially against China, which has much
better transportation and power infrastructure, the garment industry is destined to become a
much weaker growth engine for Cambodia.
After the garment industry, construction is the most important industrial sub-sector.
The growth of the sector has benefited from the expansion of both garment and tourist
activities, as well as from government infrastructure projects (largely paid by foreign aid).
The services sector grew mainly because of the rise in tourism (hotels and restaurants) and in
the health and education sectors, both sectors heavily dependent from investments paid by
foreign aid.
In sum, it is remarkable to find that the primary livelihood of most (poor) people in
Cambodia – agriculture – has attracted little investment in recent years and has experienced
relatively slow growth, while its levels of productivity has remained very low. Agri-business,
a traditional link to a more manufacturing-based economy, has failed to expand despite
surplus agricultural output. With substantial uncertainties about the two current engines of
growth, which both are also very much urban-focused with weak urban-rural linkages,
Cambodia seems in need of a more rural-focused engine of growth as well, first, to sustain
current levels of economic growth and, second, to accelerate poverty alleviation. As Coe et al.
(2006:4) state: “As a small open economy with ample unused arable land and a large
unskilled labour force, Cambodia’s comparative advantage is widely recognized to be
agriculture”. But this asks for more attention for the binding constraints preventing the
agricultural to grow faster and raise its productivity, which goes beyond the scope of this
paper (see ACI and Camconsult 2006).
4. Conclusions
This paper contains a brief investigation in what lies behind growth accelerations in Uganda
and Cambodia, two countries that share similarities in their post-independent history, starting
with an optimistic period of growth followed by a traumatic period of war, civil strife, and
oppression, and since the late 1980s recovering from this conflict period. Though in particular
the growth accelerations in the post-conflict period look impressive at first sight – and both
countries have attracted much academic and donor interests for this – the exploration in this
paper also suggests that the Emperor wears less clothes than is generally thought. Besides
strong rebound effects shortly after the conflict periods, much of the growth acceleration
performance can be traced back to idiosyncratic events, most of them externally induced,
which helped the countries to take off and sustain their growth rates. These events include
buoyant prices for export commodities, favourable trade arrangements, and high aid inflows.
Domestically, macro-economic policies that created macroeconomic stability, in particular
prudent fiscal and exchange rate policies, have contributed as well. In addition, the growth
that has been achieved has been based exclusively on resource exploitation, and far less on
increased land and labour productivities, in particular in agriculture. And last but not least,
both countries have still a relatively small base for economic development. Cambodia largely
23
depends on exports of garments and tourism, and Uganda’s economic drivers include on the
one hand the construction sector and community services sector - both largely fuelled through
foreign aid - and on the other hand agricultural exports. This together creates questions on the
sustainability of the growth accelerations in both countries.
This working paper is as it says a paper that presents work in progress. The above
conclusions are based on what comes forward from the brief analysis in this paper, but this
analysis needs to be deepened to fully understand the nature of economic growth
accelerations in both countries and their sustainability. This paper opens up avenues for
further research within the Tracking Development project. For instance, growth analysts agree
that in the end the sustainability of an economy depend on increase in total factor productivity
(TFP) and levels of investment. In both countries these variables are low, and further research
may delve into reasons why this is the case. Growth analysts are sharply divided about the
extent to which investment and TFP growth are determined by factors like initial income,
savings rate, geography, demography (including health issues), education and governance –
the latter including both policies and institutions. It might be an interesting exercise to
investigate these issues further for both countries, by for instance, conducting a binding
constraint analysis for both countries, and confronting policy makers and other parties with
this analysis in both countries. The latter may be a unique method to get more insight in the
political economy of growth in developing countries as well. This type of analysis should
rather be done at sector level (agriculture, industry, services) than at macroeconomic level.
Since the majority of the population in both countries still depends for their livelihood on
agriculture, agriculture seems to be the most obvious sector to start with. But given recent
developments in both countries, whereby can foreseen that the agricultural sector will be
unable to create sufficient employment for a fast growing population, analyses of the other
sectors may prove valuable as well.
Specific for the comparison between Uganda and Cambodia, it would also be
interesting to delve into the question whether and to what extent the post-conflict status
influences economic growth and performance. It can well be that in a post-conflict situation
economic recovery has a number of political jobs to do as well: in the short run, it needs to
placate or neutralize political opposition (from insurgents and militia to legislators); build
support for government in both the rural and urban areas and the capital; and in the short run
and beyond, signal a return of confidence and change for the better. In post-conflict situations,
it is also essential to plan comprehensively for economic recovery prior (or immediately
following) international intervention. This is complicated, undoubtedly, by the ‘swarm’ of
largely uncoordinated international involvement in the immediate surge of post-conflict
activity and interest. Experiences from elsewhere show that economic initiatives and
programmes in post-conflict countries share four main weaknesses aside from the challenge
of delivering growth in an unstable political-security climate: they are externally-driven (even
if internally-shared and even devised); they have given insufficient direction on priorities;
they have inevitably focused on ‘what’ countries should do, rather than the more difficult
question ‘how’ to do it; and they have relied on overly-complex policy prescriptions that do
not match on-the-ground reality fraught with complex dynamics. Whether this has also been
the case for Uganda and Cambodia could be part of the research outlined above.
24
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