Last week, on a visit to Gen. Salim Saleh in Kapeeka, I decided to also visit “his” industrial park. Although I travel for fortnightly pilgrims to Kapeeka to dialogue with Saleh, I last visited the park in 2018 when it had only one mango processing factory working.
Now, the park has a ceramic factory, Goodwill, which works 24/7 producing 40,000 metric tons of floor tiles daily. Then a second ceramic factory produces bathroom ware – sinks, toilets, bathtubs and other ceramic products like plates, cups and jugs. In both ceramic factories, local materials contribute 95% of total input.
There is another factory producing florescent tubes, bulbs and other electric wares; another producing school bags and suitcases and another weaving clothes. In total, the park has 20 factories that are in operation and another 40 under construction.
Already, Goodwill Tiles is a popular brand that has conquered the Ugandan floor tiles market and is now also a competitor in regional markets in South Sudan, DRC, Eastern Kenya and Northern Tanzania. Others factories in the park export their goods to China.
In Kapeeka, and increasingly in many other parts of Uganda, Saleh has initiated a quiet revolution: the shift from our much-loved agriculture to manufacturing.
But being populist, Saleh has retained his agrarian attachments. In my many debates with him, he strikes me as someone who thinks we can create a society of prosperous peasants by investing in increasing household incomes at homestead level. It is an exercise President Yoweri Museveni, seems focused on. Sadly, it is an exercise in futility.
Intellectually, Museveni understands that the future of Uganda lies in manufacturing. I suspect his obsession with increasing household-incomes in agriculture is driven by political, not economic considerations.
Uganda’s manufacturing prospects are looking good. For two decades, the share of manufacturing to GDP had stagnated at 8%. And Uganda was not alone. Across Africa, and with the exception of Ethiopia, our continent has been de-industrialising i.e. the share of manufacturing to GDP has been declining or stagnant – including in South Africa, the most industrialised country on the continent.
This was largely a result of the success of neoliberalism in Africa where our governments were convinced by international financial institutions to abandon industrial policy. Today, I am proud to reveal that the share of manufacturing to GDP in Uganda is 18%.
Why is manufacturing important? Because it is an activity that adds value to our products, has infinite possibilities for productivity growth and creates large-scale blue-collar jobs for the less skilled.
The main cause of our poverty is the production and export of unprocessed goods. These make us earn less money in international markets since they tend to attract continually declining prices – to put in in economics language, they face deteriorating terms of trade. Yet we import finished products i.e. value added products, which enjoy improving terms of trade i.e. continually improving prices. This also explains our persistent trade deficits.
Why and how has Goodwill succeeded in conquering the local Uganda market and is now penetrating the regional one?
First government imposed a 100% duty on imported tiles, thereby making them immediately uncompetitive domestically.
Second, Goodwill works on a large scale. The factory in Kapeeka is 960 meters long employing 600 workers on a 24/7 basis and produces 40,000 metric tons of floor tiles per day. This allows the firm to enjoy economies of scale.
As production lines increase their volume of output, they tend to reduce their unit costs. This is the reason one can buy a square meter of floor tiles from Goodwill for as low as Shs25,000.
Goodwill gives us the best idea on how to construct industrial policy in Uganda. Our few industries are not competitive not just in international markets, but most critically, even on the local Ugandan market.
From textiles to sugar (where we produce the raw materials cotton and sugar cane ourselves), it is cheaper to import clothes from China and refined sugar from Brazil and Cuba than to buy it locally. There are a couple of factors that cause this; such as the cost of electricity (a kilowatt hour of electricity in Uganda is 7 US cents against one cent in China), the cost of credit (interest rates in Uganda are 17% whereas in China they are at 2%) etc.
But the biggest competitive disadvantage to Ugandan manufacturers is their small scale. As already explained above, this greatly explains their high unit costs. What is needed is for them to expand in plant size to capture economies of scale. One needs to study east Asia to see how governments used industrial policy to drive manufacturing growth.
The size of firm or plant required to achieve the aforementioned economies of scale is typically large in relation to the assets of firms in a poor country. The risks that confront potential investors are therefore high. Hence the investment process gets slowed down unless these risks are significantly reduced.
In Japan, for example, the government assumed the risks of large-scale investments using subsidies to firms.
This allowed Japanese firms to price their products at below current average costs in order to gain market-share against foreign rivals in the domestic market. Thus, the government was able to carry a company’s negative cash-flow through these various forms of subsidy.
As firms gain market share and increase production, the unit costs fall eventually to match this forward price. Then this assistance would be removed and applied to the next stage of even higher technology industries to be nurtured to international competitiveness.
In Uganda, Museveni got convinced that subsidies lead to corruption and inefficiency. But this is only partly true and only in some countries. In fact, for East Asian tigers, subsidies were the basis of industrial growth and international competitiveness. As the example of Japan above teaches us, the subsidies were not permanent, were also target driven and time oriented.
Once a particular level of pricing had been achieved within an agreed time frame they would be removed. The second lesson was that subsidies were industry, not firm-based as Uganda has always done.
If Uganda wants to outgrow its chronic trade deficits, create large scale jobs for its youth, put itself on the path of continuous productivity growth, and gain a foothold on the ladder to economic transformation, then it must think manufacturing.
It will have to give incentives to firms such as tariff protection, different forms of subsidies, access to long term affordable credit, cheaper electricity, better infrastructure to transport goods, etc. By The Independent.