IMPORT SUBSTITUTION AND EXPORT PROMOTION FOR SUSTAINABLE ECONOMIC

IMPORT SUBSTITUTION AND EXPORT PROMOTION FOR SUSTAINABLE ECONOMIC GROWTH Ministry of Finance, Planning and Economic Development, Uganda Economic Growth Forum Kampala, 22 nd AUGUST 2019

OUTLINE • • • Introduction Evolution of the Trade Deficit Trade Policies – Country Experiences Lessons Learnt Import Substitution and export promotion – Ugandan Context • Recommendations 2

AIM FOR LESS IN…. MORE OUT! 3

INTRODUCTION • Uganda’s imports are almost twice as much as the exports • Uganda’s trade deficit is higher than about 60% of the world economies • Imports in particular of complex intermediate inputs and machinery cannot easily be produced locally in the short term, however imports of simple consumer items can be produced locally. • An import substitution and export promotion strategy can address the above challenges and subsequently accelerate inclusive economic growth 4

Evolution of the Trade Balance Trade balance(goods and services) Million US$ 0, 00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -500, 00 -1 000, 00 -1 500, 00 -2 000, 00 The trade deficit has generally been widening over time -2 500, 00 -3 000, 00 -3 500, 00 Source: Bank of Uganda 5

Share of Imports and exports to GDP 30% 31% 30% 29% 28% 27% 18% 2009 17% 2010 19% 20% 17% 2011 16% 2012 Share of exports in GDP 23% 22% 21% 2008 29% 2013 2014 16% 2015 2016 17% 2017 17% 2018 Share of imports to GDP Source: UBOS Although the share of imports to GDP has steadily declined, it has remained relatively high averaging 27% over the last 10 years Share of exports has stagnated over the last 10 years, at only 18%. 6

THE IMBALANCE TOP EXPORTS (Percentage of total exports) Vs Average Exports (2012/13 -2017/18) TOP IMPORTS (Percentage of total imports) Average Imports (2012/13 -2017/18) Petroleum, petroleum products and related materials Road vehicles (air cushion vehicles) 20% Medical and pharmaceutical products 6% 5% Iron and steel 5% Vegetables and fruit 5% Cereals and cereal preparations 5% Petroleum, petroleum products and related materials 5% Machinery specialised for particular industries 4% Iron and steel 4% Fixed vegetable fats and oils, crude, refined or fractionated Plastics in primary forms 4% Coffee, tea, cocoa, spices and manufactures thereof 19% Cereals and cereal preparations 9% Fish, crustaceans and molluscs and preparations thereof 6% Gold, non-monetary (excl. gold ores and concentrates) Vs 9% 3% Source: UBOS Consequently, Uganda has experienced persistent trade deficits and vulnerability to global commodity price shocks. 7

THE IMBALANCE Source: UBOS 8

Country Experiences on Trade Policies • To correct the imbalance, many developing countries adopted import substitution policies especially in the 50 s, 60 s and 70 s. • For most developing countries, this period was characterized by • • limited physical and human capital low literacy rates unskilled labour declining terms of trade. • However, some countries (Asian Tigers) supplemented the inward looking policies with outward looking policies 9

Import Substitution • Mainly prevalent in the post second world war era particularly in the 50 s, 60 s and 70 s • An attempt by most developing countries (Asian, African and Latin American) to fix the trade imbalances, attain self reliance and economic growth. 10

Why import substitution alone may fail? 1. Decline in Competitiveness due to protectionism • Favored emergence of inefficient monopolies and oligopolistic firms (Case of Latin American Countries) • Currently Uganda ranks as 117 out of 140 countries ranked in the global competitiveness report of 2018 2. Stunted the stages of industrialization • Promoted manufacture of only simple consumable products in early stages but could not progress to the next stage of industrialized products (Balassa, 1982) 11

Why import substitution alone may fail? 3. Led to persistent Balance of Payment Deficits • Protected domestic firms demanded much more imported intermediate inputs while producing low value exports. • The outcome of this was a recurrent balance of payment deficits and a seemingly closed economy in which firms focused almost exclusively on protected domestic markets (Guillermo, 2006). • Today, about 70% of world trade takes place in intermediate inputs, parts and services and not in finished products (OECD 2018: 1) 12

Why import substitution alone may fail? 4. Reciprocal Retaliation • Import substitution could prompt retaliation • Implications for market access with some trading partners • A case in point is the ongoing global trade tensions. 13

It is not all bad - Case of the Asian Tigers (Policy Mix) • The Asian Tigers initially focused on substitution but unlike the Latin American countries, they adopted export promotion strategies in the 60 s and 70 s to supplement import substitution (Oman and Wignaraja, 1991) • Domestic industries remained heavily protected and subsidized • However, there was enforcement of discipline by the state: • domestic industries were given export targets • strong government supervision • credible time limits to protectionist policies 14

Country experiences – Lessons • Focusing on policies to support import substitution associated with only short term benefits • Literature shows that a policy mix of import substitution and export promotion is critical to attain sustainable long run benefits (Abhyankar and Dharmadhikari, 2011) 15

Import substitution and export promotion strategy in the context of Uganda 16

Country Initiatives to address the trade imbalance Strategy/Policy Main goal National Strategy for Private sector Development, 2017/18 -2021/22 Envisages a competitive private sector that supports inclusive growth sustainable economic development National Industrial Policy, 2008 Largely focused on Value addition and increasing proportion of manufactured goods to both exports and GDP as well as competitiveness National Trade Policy, 2007 In part to support productive sectors of the economy to trade both domestically and internationally. National Export Development Strategy, 2017/182021/22 Overriding objective is to increase the value of Uganda’s exports in targeted markets Buy Uganda Build Uganda BUBU Aimed at encouraging domestic consumption of domestically produced commodities 17

Policy actions to implement the strategies and policies Policy action Mechanism Higher import tariffs on selected commodities produced domestically (EAC) Regional Integration (Customs Union, Common Market protocols) Construction of Industrial Parks e. g at Kapeeka, Namanve, Luzira, Byeyogerere, Kampala, Soroti of which some are already operational. Budget Strategy Fourteen free zones have been set up and licensed to produce for export, in Arua, Jinja, Kalungu, Mpigi, Mukono, Wakiso, Tororo, Kampala, and Buikwe. Budget Strategy Tax subsidies to promote local investments and industrialisation within these parks. Budget Strategy 18

Policy actions to implement the strategies and policies – cont’d Distribution of good quality seedlings, breeding materials and construction of irrigation schemes: Budget Strategy : • coffee export volumes have increased by 26 percent from 3. 7 million bags in 2008 to 4. 5 million bags in 2018 Infrastructure development for example roads, storage facilities and electricity. FY 2019/20 Budget: • UGX 147 bn was allocated for the electrification of industrial parks • UGX 103 bn was allocated for the development of supportive infrastructure in export processing zones and industrial parks. • Government has implemented various measures to address the trade imbalance and achieve more trade benefits. 19

Justification for Policy Actions in the budget strategy Commodity Import Multiplier Content Import content as % of Commodity multiplier Agriculture 3. 25 0. 70 21. 4% O/w Cash crop 3. 28 0. 70 21. 5% Other Agric Crops 2. 98 0. 70 23. 6% Animal Husbandry 3. 41 0. 66 19. 4% Industry 2. 78 0. 87 31. 3% O/w Agro-processing 3. 31 0. 80 24. 3% 2. 60 0. 89 34. 3% 3. 31 0. 66 19. 9% Other industry Services Source: Mo. FPED calculations An analysis of the structure of the economy shows : • Industrialisation drive should start with sectors that have the least proportion of locally sourced raw materials • Agro-processing under industry has relatively more locally sourced raw materials • Justifies part of the budget strategy prioritising tourism, Agroprocessing for import substitution with a goal of export promotion 20

Recommendations • Develop an import substitution and export promotion strategy for sustained long term economic growth • An effective strategy entails: • Giving incentivized domestic industries export targets • strong government supervision • credible time limits to protectionist policies • Prioritizing Commodities with low import content (available domestic raw materials), and strong backward and forward linkages for import substitution and later export promotion e. g milk, tiles, agro-processing, cement, pharmaceuticals. 21

THE END THANK YOU 22