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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. 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