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Cambridge don makes case for state role to direct development

 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.

Dr Ha-Joon Chang speaking

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.


0 #1 Robert Atuhairwe 2017-12-02 18:15
IMF and WB's structural adjustment policy is the biggest mistake to happen to Uganda.

It must be revised forthwith. It prematurely exposed the country to the rigors of globalism. Trump-style is what President Museveni should apply in this regard
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0 #2 rubangakene 2017-12-02 21:52
Tell that to the President! he says the army has engineers to build roads and railways, run farms and hospitals, wealth creaation etc.,. But we haven't seen these gun trotting people anywhere.

What this country needs is a total rethink.

Introduce mandatory national service to improve capability and employability and therefore solid development.

Clear the streets of boda- boda and invest in meaningful transport infrastructure. (Boda-bodas are normally used by our politicians as an indicator of development; what a circus!
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0 #3 anoni 2017-12-03 11:53
So you need an expensively flown in professor from Cambridge to come and tell us the obvious.

One local professor said the same at the Ugandan Engineers dinner on Friday 24th November 2017. It's not rocket science.
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0 #4 Cabanga 2017-12-03 17:51
This gospel on the role of government in development must be preached to all African politicians
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0 #5 Tim 2017-12-03 20:00
Obvious and commonplace stuff. Look at the state of the private sector in Uganda!

The notion that they provide better goods and services than government has generally been false!
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0 #6 Nansinguza Jacob 2017-12-04 12:25
Dr Ha-Joon Chang's observation is fundamentally true. A developing economy's Industrial Capacity cannot match the developed one.

So the Free Market Enterprise, even across borders, means that local economies will only provide market for the developed ones.

It is markedly black and white, when one takes a look at the Balance of Payments for Uganda.

In their report, "Can Africa claim the 21st Century", the world bank indeed notes that Africa, more so Uganda, has has few exports to the international Markets.

In a paper titled "How Should Uganda Grow?" by Ricardo Hausmann, Brad Cunningham, John Matovu, Rosie Osire and Kelly Wyett clearly denotes how Uganda has been affected by raw exports.

I think, its high time, the government looks into practical and sustainable economic development models suited for our economy by taking a leading role and not a back seat "Privatization" fallacy.
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