University of Cambridge economics don Dr Ha-Joon Chang has said government must never leave markets to define its growth path, especially when the country is still at the early stages of development.
“All of today's rich countries, except for the Netherlands and (pre-WW1) Switzerland, used protectionism for substantial periods in order to develop their economies," said Dr Chang, implying a state must come in to protect local firms from lethal competition from already advanced countries.
Chang, who gave the key note address at this year’s Joseph Mubiru memorial lecture hosted by Bank of Uganda, said advanced countries that are now preaching free markets never did so when they were still developing. Instead, he said, they increased tariffs to keep foreign competition at bay.
They also restricted importation of luxurious goods and encouraged importation of raw materials and capital goods.
In what he described as “kicking away the ladder”, Dr Chang said it was ironical that what the now rich countries used to develop is not what they are telling poor countries to do.
“State ownership kick-started industrialization in Germany and Japan," Dr Chang said.
For the case of Uganda, the opposite has happened, perhaps explaining why the country has not made any headway in development. Government has taken a back seat, selling off state enterprises while leaving markets decide the path of the economy.
This was the prescription that the World Bank and International Monetary Fund (IMF) gave for Uganda in the early 1990s in a liberalisation swoop. Uganda was told this is what it needed to do to develop.
Key enterprises like the state-owned Uganda Commercial Bank (UCB) and other entities were surrendered to the private sector. Recently, President Museveni complained about the high interest rates and said it was a mistake that government had sold a state bank.
Countries like Taiwan and South Korea that were at the same level of development with Uganda in the 1960s have since developed as the former still trails – did not just open their economies. In fact, they strategically opened where they were sure they could compete favourably with the rest or where they needed essentials like drugs that they needed not manufacture at the time.
"Even when their average tariff rate was not so high, today's rich countries often provided high protection for strategic industries," Chang said.
“In the USA, state-owned enterprises (SOEs) account for only about 1per cent of US GDP, but the country has had one of the most successful SOEs in human history – except it is not called SOE. It's the US Military," he said.
Dr Chang said Britain and USA, the champions of free markets, had the highest tariffs in their early stages of development. Tariffs are a tool used to protect local industries against foreign competition. For instance, in 1820, Britain tariffs were 45-55 per cent on manufactured imports while United States had 35-45 per cent.
“Pragmatism actually requires a very high degree of imagination, as you can be truly pragmatic only when you can liberate yourself from the shackles of ideological prejudices, conventional wisdom, and historical myths and dare to imagine a different future," Dr Chang said. "In devising their development strategies, developing countries need to be ambitious in terms of their final goals."
Chang warned though that not all intervention will do. Programs and policies, he said, must be designed well.
The deputy BOU governor, Dr Louis Kasekende, said: “We agree that we cannot keep on doing things the same way.” He added, however, that he didn’t want people to go way thinking the Ugandan government has not intervened in the economy.
Dr Chang concluded that a lot more dialogue is needed between the government and the private sector.
“We have also agreed that government support should not be unconditional," he said.