Linda Calabrese (Research Fellow, ODI)
16 January 2020
Our recent study on industrialisation in Uganda supports President Museveni’s focus on attracting investors from China, but Uganda needs to diversify its exports beyond primary products.
During a recent meeting between Uganda’s President Yoweri Kaguta Museveni and China’s high-ranking diplomat Yang Jiechi, President Museveni encouraged China to buy more agricultural goods from Africa. President Museveni has often encouraged African exports, especially in relation to China. In the past, he argued that Uganda imports too much from China, including goods that could be produced locally – and he encouraged African countries to produce and export more to China.
This is part of a broader narrative put forward by President Museveni, aiming to achieve an overall trade surplus with the rest of the world. The Government of Uganda has taken several steps in this direction, towards a development model hinting at import substitution, as the Buy Uganda Build Uganda policy attests.
The Government of Uganda wants Ugandan firms and entrepreneurs to produce locally and to use as many domestic inputs as possible. This means making shoes from Ugandan leather, or furniture from Ugandan wood, but also focussing on certain sectors, namely agroprocessing and extractives, based on domestically produced agricultural and mineral goods.
This has a rationale grounded in geography, as we discussed in our study on industrial development in Uganda. Uganda is a landlocked country, with high costs of transport that make imported goods quite expensive. Industrialising by using domestic goods would allow the country to save a lot of money in transport costs. However, this translates into an industrialisation model that is narrowly focussed on a few selected products, and excludes other pathways, such as global and regional value chains.
What role does China play in this story? This is two-fold one – as part of both the trade and industrialisation story.
On trade, China is the biggest source of Uganda’s imports, providing 15% of all imported merchandise in 2017 (followed by the UAE and Kenya). China exports to Uganda much more than Uganda exports to China. Uganda has consistently had a negative trade balance with China since at least the mid-1990s. While China exports a diversified mix of goods (electronic goods, garment, footwear and machinery) to Uganda, 90% of Uganda’s exports to China are agricultural goods, comprised mostly of leather and skins.
China provides duty-free, quota-free access to its market to least-developed countries such as Uganda. Most of the goods Uganda exports the most to the rest of the world which include coffee, tea and gold can therefore already be imported into China at 0% tariffs.
In terms of industrialisation, China is an important player in Uganda’s economic development. President Museveni repeatedly invited Chinese investors to come to Uganda, and these invitations were responded positively by investment in the country’s manufacturing sector, including the recent establishment of an electronics assembly plant near Kampala. In addition to China, investors from other emerging markets and from the rest of East Africa are also involved in the Uganda’s manufacturing.
Based on this, we can ask: is President Museveni’s call for a closer engagement with China the correct one?
Uganda should definitely aim to export more, but there are two caveats. The first one is about the trade surplus. For Uganda to have a trade surplus might not be necessary in the short term. Uganda receives remittances and aid from abroad, that help cover its import bills even if the exports fall short. Moreover, imports are very important for a country aiming to industrialise and therefore it may not be wise to try to reduce them at all costs.
Secondly, President Museveni called for more exports to China (and not just any country). Of course, exporting more would be better, but Uganda should not try to export the same agricultural products (as President Museveni seems to suggest). Instead, it should aim to diversify its export basket. Ugandan businesses should try toproduce and export a wider range of goods, including manufactured ones.
The goods that Uganda could realistically produce at this stage (garment, footwear, small electronics, packaging etc.) are already produced by China efficiently and at lower costs. Or they are too bulky (e.g. furniture and construction materials) to be shipped to China and remain competitive given the transport costs.
This is the situation faced by many developing countries, including those geographically closer to China (e.g. Cambodia). Despite having similar duty-free, quota-free access to China, the US and Europe, these countries mostly export to the latter. It is likely that Uganda would face a similar situation. Therefore, the best strategy for Uganda would be to aim to diversify its exported goods – and not to mainly focus on China as an export market.
Then there is the issue of industrialisation. If we agree that Uganda should produce and export a wider range of goods, this is crucial. To expand its production, Uganda may need to import more machinery, equipment and materials. This call for more imports, rather than less – but it does not matter, if it is beneficial for exports to grow as well.
To promote industrialisation, we have seen that President Museveni is inviting investors from many countries, including explicit invitations to Chinese investors. Together with India, China is the main investor in the country. We do not have disaggregated data to confirm whether Chinese firms invest more than others in Uganda’s manufacturing sector. However, in the whole of Africa, we know that while the largest investors (US, UK and France) focus their investments on the extractive and financial sectors, Chinese companies invest heavily in extractives and construction, but also, to a smaller extent, in manufacturing. President Museveni decided appropriately to engage with investors from China. He could also extend the invite to other emerging markets and regional investors that can add value to and enhance Uganda’s produce and exports.
The Government of Uganda’s strategy to transform the economy, create jobs and improve livelihoods should focus on transforming production and raising exports, aiming for European and African markets, rather than only Chinese. Uganda would need to look beyond agribusiness and extractives, and consider whether the country can be a more active participant in global and regional value chain production. The Government of Uganda could increase its efforts in investment and local production promotion and aftercare, as well as in building better infrastructure to attract and work with other investors from China and India.
Photo: A marketplace in Kampala, Uganda. Arne Hoel / World Bank . CC BY-NC-ND 2.0