Why does Uganda need service-led growth?
Uganda has an ambitious goal of growing by ten-times in the next 16 years. To achieve this, Uganda will have to shift much of its labour from agriculture to higher productivity work in cities.
As part of the National Development Strategy IV (NDPIV), the government of Uganda is aiming to grow the economy by ten-fold between 2024 and 2040. To achieve this, Uganda will have to undergo structural transformation—shifting labour from lower to higher productivity activities. Agriculture is by far the largest employer by sector in Uganda and is characterised by low productivity and informality. For long-term sustained growth to occur of the kind outlined in the NDPIV, many of those working in agriculture will have to move into services work. Services employment, accounting for 26% of the labour force, is growing, and services are already a critical part of the economy and an essential component of its exports.
The IGC partnered with the Ministry of Finance, Planning and Economic Development (MoFPED) to host Uganda’s 8th Economic Growth Forum (EGF), where Uganda’s need for service-led growth drew insightful academic and policy discussion.
Uganda’s service-led growth today
Unlike the structural transformation of today’s high-income countries, low- and middle-income countries like Uganda are growing by shifting their labour force from agriculture directly into services instead of industry. One reason for this is that modern manufacturing technology requires fewer workers with more specialised skills. The increased competitiveness of the manufacturing sector and the regionalisation of supply chains also make it difficult for low- and middle-income countries to successfully break into these markets.
Andrew Womer, a Country Economist at the IGC, spoke about the rising importance of services in structural transformation in Uganda and Africa. Over 80% of structural transformation in Africa over the 1990-2018 period happened because of the productive shift from agriculture to services. In Uganda, the services sector is the largest contributor to GDP by value added and accounted for 36% of overall exports in 2019. When shocks to the Ugandan agriculture sector occur, services appear to be absorbing agricultural labour (see the shaded area of Figure 1). Services, therefore, might be the more natural substitute for agricultural labour over manufacturing and industry.
Of course, services are a broad category for work, constituting low-skill domestic, low-skill tradable, high-skill social and knowledge-based services. Workers that leave agriculture are more likely to at least initially be employed in low-skill domestic and tradable services, which is the services work that Uganda and other low-income countries specialise in. To sustain long-term growth, however, Uganda will need to have more people working in the higher-skill services.
Figure 1: Employment and value added (% GDP) in Uganda
Tourism is Uganda’s largest services export
Wilber Ahebwa of Makerere University discussed how tourism can be a springboard for Uganda’s growth. From the structural transformation perspective, tourism is appealing because it is labour-intensive and offers opportunities for both low- and high-skill workers. The start-up capital required to set up a business in tourism is also relatively low. It tends to promote regional development because of the balanced distribution of Uganda’s natural assets, which attract high-spending international tourists.
Figure 2: Uganda's services exports (billions USD)
Wilbur Ahebwa stresses that the priorities for growing Uganda's tourism sector include fiscal and monetary measures to catalyse private sector growth. This could involve:
- Tax exemptions for the tourist industry, harmonising the tax regime and establishing a tourist investment fund for entrepreneurs (who currently have few financing options).
- Enhancing the brand and image of Uganda as a potential destination for international leisure tourists is also critical. Targeting high-potential markets through advertisements and marketing campaigns could be an important part of this effort.
- Improve wildlife management through anti-poaching efforts, addressing human-animal conflicts, and investing in removing invasive species in national parks.
- Expanding tourism infrastructure, especially road access to key attractions and upgrading less-visited sites with high potential, like Pian Upe Wildlife Reserve.
- Upskilling the workforce through initiatives like the Uganda Hotel and Tourism Training Institute will be necessary to ensure that tourists have a great experience while visiting Uganda, which is the core of developing the brand as a destination.
Investing in ICT skills and infrastructure could boost Uganda’s GDP
Investing in Information and Communications Technology (ICT) infrastructure and skills development can benefit Uganda's economy through two key channels: technology adoption and increased productivity at both firm and worker levels.
Currently, Uganda ranks below other low-income countries in ICT development according to the Network Readiness Index (NRI). To address this gap, Uganda can focus on partnering with the private sector to provide ICT training programmes and expanding broadband coverage across the country. ICT skills are highly correlated with GDP per capita (see Figure 3). The high productivity of people employed in ICT implies that even a modest increase in the number of workers in ICT as a proportion of the overall labour force can help raise incomes more broadly.
Figure 3: ICT human capital, Africa versus rest of the world
Studies in sub-Saharan Africa have shown that investing in broadband increases employment opportunities for workers at various skill levels, has positive impacts on growth, and is associated with more years of schooling. Increasing broadband has such widespread effects because digital services input into nearly all economic activities and foster commercial activity by informing consumers, reducing the distance between consumers and businesses, and facilitating transactions (such as mobile money).
Formalising the retail sector
The retail sector employs 18% of Uganda's workforce and has productivity levels comparable to manufacturing. Unlike ICT and other knowledge-based services, it absorbs the labour of low-skill workers, which is crucial in Uganda and sub-Saharan Africa, which have a young and rapidly growing population. Large, formal retailers create abundant jobs and improve the capacity of domestic suppliers. Walmart’s entry into Mexico is a famous example, which provided higher quality jobs, cheaper goods and improved the productivity of domestic firms that were exposed to Walmart’s supply chain. Additionally, the lack of physical infrastructure and tariffs on imported goods are major constraints to the formalisation of the retail sector in Africa.
Services will be important to Uganda's structural transformation and achieving the goals of the NDPIV. Uganda’s largest services export tourism can be a vehicle for structural transformation because it provides employment for high- and low-skill workers. It also has high growth potential because of Uganda’s unique natural assets. The ICT sector could boost growth because of its high labour productivity relative to other sectors, including manufacturing. Uganda has a low ICT skills base and infrastructure compared to low-income peers, making investments in the area potentially worthwhile. Retail can also be a key sector for policy consideration because it can absorb low-skill labour from rural areas more easily than ICT and other knowledge-based services.