Globaleyes

The Poverty Trap: A Ugandan Perspective on Globalization

Caroline Ekobu

This is the fourth in a series of articles on economic globalization with an international perspective sponsored by the Peace Ministries Program of MCC Canada.

 

Uganda has sometimes been held up as a globalization success story. But the reality for many Ugandans has not been economic riches but rather increased poverty.

 

There are a number of reasons why this is happening.

First, increased competition is driving out local businesses and goods. International firms got a big boost when Uganda dismantled its marketing boards and cooperatives, lowered trade barriers and reduced restrictions on the operation of foreign firms as part of government agreements with the International Monetary Fund/World Bank. This opened the door for foreign companies to compete unfairly in a less developed market place.

As a result, each year an increasing number of international companies, with advanced technology and superior human resources, set up business in Uganda. They compete with less sophisticated local firms and take over lucrative business in the country. The textile industries in Uganda are one example of this. Cheap textiles and used clothing from abroad depress market prices for locally produced products, making it unprofitable for them to operate. Thousands of jobs for cotton growers have been lost.

Not only do international firms have advantages in setting up business in Uganda, but their supply chains also hurt local Ugandan enterprises. In large towns, every street has at least one supermarket. But when these new supermarkets set up, they already have well-established global supply chains, and do not have room for local goods. Now, one can hardly see a Ugandan product on their shelves.

Buyers within these global supply chains continue to raise requirements for suppliers in terms of volume, reliability and quality — all which require ever larger investments and hold back local suppliers.

So, economic globalization has meant Ugandan manufacturers and suppliers are finding it increasingly difficult to gain entry into local markets. But globalization has also hurt Ugandan companies dependent on global markets.

Heightened competition with other exporters of low-skill manufactured goods is another major factor in the poverty trap for Uganda. Uganda has sought to gain some competitive advantage by adding value to its products. But in recent years, what has actually happened is falling terms of trade in almost every commodity. High quality Arabica coffee from Uganda, for example, sells for a low price on the world market. But when bought by the coffee roasters in Europe, the Arabica coffee is mixed with the cheaper Robusta coffee. It is then packaged with European labels and resold at higher prices than the pure Arabica coffee from Uganda can demand.

Unfortunately, there is not a large market in Uganda for coffee, so coffee growers are dependent on the external market. International buyers of Ugandan coffee also will not accept a value-added product. They only purchase the raw product and add their own value to match the taste of European consumers.

All this competition has led to greater unemployment in Uganda.

Even young people employed on farms are getting poorer as their agricultural products regularly sell for prices below the cost of production. One would expect that producers would sell their agricultural products to industries that would add value and shelf life. But since this is not happening, local producers suffer. Many young people are migrating to urban centers to seek casual labour there. While unemployment statistics are not readily available, the reality is evidenced by the large number of people with limited or no skills on the streets of Kampala.

The persistence of extreme poverty in Uganda therefore should be seen as the failure of commodity dependent countries to share in global economic growth. The cycle of generalized poverty and economic stagnation is reinforced by falling and volatile real primary commodity prices of coffee and cotton, unsustainable external debt and finally a donor driven aid/debt service system. There has been a long-term downward trend in poor countries of the commodity prices since 1960.

The huge debt burden is owned by the government, and debt servicing has reduced resources available for public investment in physical and human capital. The debt acts as a deterrent to private investment, particularly because domestic interest rates are extremely high. There is a general perception of risk that discourages both lenders and investors. Debt service payments also tighten the foreign exchange constraints. In Uganda, the unsustainable external debt also undermines the government's ability to provide public goods, such as education and Medicare to all

There are three issues in overcoming the poverty trap in Uganda. First, breaking the dependence on primary commodities would help Ugandan companies better compete in world markets. Second, removing the staggering debt burden would attract investment to help build the Ugandan economy, and also make it possible for the Ugandan government to invest in public goods necessary for economic growth.

Finally, a third response would be to enhance south to south cooperation of trade by encouraging regional trade and investment, as well as by developing a regional approach to transport infrastructure financing.

These responses will help break the negative grip economic globalization has had on Uganda and help Uganda throw off the poverty trap.

 

Caroline Ekobu is a development worker for COU-TEDDO (Church of Uganda Teso Planning and Development Office), an MCC partner in Uganda. She holds a master's degree in arts, social sector planning and management from Makerere University, Kampala, Uganda.

 

The perspectives included in Globaleyes do not necessarily reflect MCC opinion.