## 2.  Economic Potential and Initial Endownments

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---

### I. Introduction and Summary
- Uganda registered one of the most impressive economic turnarounds of recent decades after turmoil following General Idi Amin’s power grab in 1971.
- Growth drivers since the late-1980s: peace, lower taxes, and improved administration of justice (reasonably independent judiciary, improving parliament, vibrant media, active civil society organizations).
- Aggregate outcomes:
  - Average real GDP growth between 1990 and 2007: 7½ percent.
  - Poverty fell from 55 percent in 1993 to 31 percent in 2006.
- Policy dilemma: strong growth and macro stability have not led to significant economic transformation and industrialization, prompting ad hoc and enterprise-specific interventions.
- Paper’s three questions:
  - To what extent has growth been accompanied by economic transformation? Main finding: some transformation but from a lower base and at a slower pace than “sustained growth” (SG) countries.
  - Why has transformation been limited? Considerations include weak fundamentals (geography, human capital, institutions), limited openness to trade (including potential aid-induced Dutch disease effects), the balance between state and markets, and globalization (“rise of China”).
  - What next for policies? Main priorities argued: improve infrastructure (roads and electricity), develop a focused growth strategy (sectoral focus, limited/time-bound support), and improve export competitiveness while balancing reliance on foreign aid and external competitiveness.

### II. The Stylized Facts of Uganda’s Recovery
- Growth performance and resilience:
  - Real GDP growth averaged close to 7½ percent between 1990 and 2007; rest of SSA averaged 3 percent.
  - Per capita growth between 1990 and 2007: Uganda 3¼ percent; Sub-Saharan Africa 1 percent.
  - Sustained growth duration: about 20 years.
  - Growth effectiveness at poverty reduction: poverty from 56 percent in 1993 to 31 percent in 2006.
- Composition and drivers:
  - Much early growth driven by factor accumulation: capital accumulation explained 85 percent of output increase during 1986-2003 (Mikkelsen, 2005); productivity contribution was negligible.
  - Macroeconomic stabilization: inflation reduced from well over 100 percent in the 1980s to single digits in the early 1990s; black market premium for foreign exchange eliminated by mid-1990s; trade barriers reduced and liberalization across sectors.
- Shortcomings:
  - Recovery mainly reversed earlier decline; per capita income only reverted to previous peak around 2000.
  - Perception of limited industrialization and structural transformation despite strong growth.

### III. Economic Transformation
- Comparative approach: Align Uganda’s take-off year as 1990 and compare transformation indicators with SG countries (sample includes Chile, China, Dominican Republic, Egypt, Indonesia, Korea, Malaysia, Singapore, Taiwan Province of China, Thailand, Tunisia, Vietnam).
- Per capita income and growth:
  - At take-off Uganda’s per capita income was well below SG average; average SG per capita income was 2½ times Uganda’s.
  - Subsequent growth rates: SG countries averaged 5½ percent versus Uganda’s 3 percent.
  - Fifteen years after acceleration: SG countries’ per capita income increased by 100 percent; Uganda’s increased by 60 percent.
- Sectoral composition:
  - Services replaced agriculture as largest sector; industry share rose from 12 percent in 1990/91 to 24 percent in 2005/06.
  - Share of manufacturing within industry broadly unchanged at some percent of GDP.
  - Uganda’s industrialization remains well below SG early-takeoff levels; transition out of agriculture has been toward services as much as industry.
- Urbanization:
  - Urban population share around 12 percent in 2005; low compared with SG take-off share close to 40 percent and low even by SSA average (~35 percent in 2005).
- Financial deepening and credit:
  - Ratio of financial liabilities to GDP about a third of SG take-off levels.
  - Private sector credit to GDP in Uganda around one-eighth of SG levels.
- Savings and investment:
  - Savings in Uganda about 9 percent of GDP (current); investment about 21 percent of GDP (current).
  - These are lower than SG averages but comparable with some low-savings SG cases (Dominican Republic and Egypt).
- Openness and exports:
  - Export-to-GDP at start of growth episode: less than 5 percent for Uganda vs. SG average around 15 percent.
  - Fifteen years on: SG average exports doubled; Uganda's goods exports stabilized around 10 percent of GDP.
  - Manufacturing exports to GDP in Uganda much lower than SG countries; only Indonesia among SGs had lower manufacturing exports immediately after acceleration.
  - Cross-country regressions controlling for determinants indicate Uganda’s openness in 1990 and 2005 are below predicted values but coefficients are not statistically significant.
- Real exchange rate:
  - Price-level-based indicator shows sharp overvaluation through late-1980s and some overvaluation in mid-1990s; SG countries showed consistent undervaluation in take-off periods.
  - Uganda’s REER very volatile in 1980s, more stable and more depreciated since 1990s.
- Demographics:
  - High population growth rate around 3½ percent; dependency ratio much higher than SG countries.
  - Life expectancy around 50 years (recent recovery from low 40s in mid-1990s); SG average at take-off was 57 years.
- Net assessment:
  - Some transformation has occurred (industrialization, savings, investment improved; export diversification increased with non-traditional items ≈ 60 percent of exports versus 20 percent in 1995).
  - However, Uganda follows SG paths from a lower base and slower pace; tradables sector performance and persistent trade/current account deficits (trade deficit widened to around 15 percent of GDP after early-1990s external financing eased) remain concerns.

### IV. Explaining the Record
- Framework: Consider four families of explanations—fundamentals (initial endowments), aid-induced Dutch disease (openness/effects of aid), policy balance between state and markets, and globalization (rise of China).

A. Fundamentals
- Geography and human capital:
  - Uganda is land-locked (distance from coastline 969 km versus SSA average 526 km in Table 1).
  - High disease burden (malaria-prone share of territory 100 percent in table), high ethnolinguistic fractionalization 0.90.
  - Life expectancy around 50 years vs. SG take-off average 57 years; average years of schooling in Uganda as of 2000: 3.5 years; SG average in 1985: 5.2 years.
- Institutions and state capacity:
  - Institutional indicators improved from being below predicted in 1990 to around or above predicted by 2005 (Heritage Foundation, Economic Freedom, World Bank governance indicators).
  - Infant mortality and other administrative-capacity proxies broadly around where per capita income would predict.
- Regression results (dependent variable: log of GDP, Table 2):
  - Institutions coefficient: 0.05 (t-stat 8.01) in 1990 and 0.10 (t-stat 9.09) in 2005 (*** significance).
  - Openness coefficient: -0.00 (t = -1.35) in 1990 and -0.00 (t = -1.57) in 2005.
  - Geography coefficient: -0.16 (t = 2.19)** in 1990 and -1.03 (t = -1.30) in 2005.
  - Uganda dummy: -0.00 (t = -0.00) in 1990 and -0.62 (t = -0.96) in 2005.
  - R-Square: 0.57 (1990) and 0.67 (2005); observations: 59 (1990), 57 (2005).
- Conclusion: fundamentals-matter-most argument has appeal but does not fully explain Uganda’s performance; policy implications limited because many fundamentals are persistent and slow-moving.

B. Openness (Aid and Dutch Disease considerations)
- Aid flows channeled through government averaged around 10 percent of GDP between 1996 and 2005.
- Mechanism: large aid inflows can appreciate the real exchange rate, bid up nontradable prices, and reduce tradables sector competitiveness (Dutch Disease).
- Empirical note: evidence of economically adverse effects of aid on activity in Uganda is difficult to detect; recent REER and price indicators do not suggest current overvaluation, and export growth has picked up in recent years.
- Policy approach:
  - Government’s stated policy: re-orient spending toward infrastructure and gradual reduction of fiscal deficit over medium-term to ameliorate adverse effects of aid on tradables.
  - Trade-offs: aid required to build infrastructure and human capital, but can exert appreciation pressures; careful monitoring of competitiveness and exports is necessary.

C. Policies (State vs. Market debate)
- Critique of pro-market reforms: in absence of strong institutions and infrastructure, markets may allocate inefficiently; calls for more active “developmental state” interventions.
- Counterpoints:
  - Uganda’s growth under pro-market reforms has been stronger than pre-reform state-led period.
  - Size of the state (government spending to GDP) has not declined; Uganda’s ratio of government spending to GDP rose since late-1980s and plateaued circa 2000.
  - Comparative indicators: tax revenue to GDP around 13½ percent in Uganda vs. 16½ percent in Ethiopia.
  - Outcome comparisons: between 1995 and 2005, per capita income growth: Uganda 3 percent vs. Ethiopia 2 percent; Uganda less volatile growth, higher private investment and domestic savings.
- Conclusion: difficult to conclude Uganda got the market-state balance wrong; current policy framework has delivered robust outcomes though gaps remain.

D. Globalization (Rise of China)
- Potential positive effects: higher commodity prices and increased FDI and aid from China.
- Potential negative effects: China’s competitiveness and exchange-rate strategy could delay migration of labor-intensive manufacturing to Africa (risk that Africa “missed the boat”); China’s rise may close off low-end manufacturing opportunities.
- Net effect on welfare in Uganda likely mixed; competition at micro-level (locations, firm environment, access to finance, skilled labor, connectivity) matters.

### V. What Next? (Policy Priorities and Trade-offs)
- Overall judgment: current policy framework has delivered notable achievements (sustained growth, private investment high by African standards, export diversification). Reforms should be complementary to this framework and avoid undermining gains.
- Three first-order interventions recommended:

1) Infrastructure (roads and electricity)
- Rationale:
  - Industry and modern agriculture are infrastructure-intensive; poor infrastructure tilts comparative advantage away from these activities.
  - Infrastructure is an essential, non-substitutable input (electricity interruptions force use of costly back-up generation).
  - Infrastructure expands markets and facilitates trade and production.
- Observations:
  - Government has increased infrastructure spending in recent budgets, but institutional frameworks for delivering large-scale railway and energy projects are questioned.
  - Example: Bujagali dam took close to 7 years from inception to construction start, with significant government inducement; Uganda’s single railway line to the sea is over 100 years old.

2) Focused Growth Strategy
- Need: identify and support 3–4 sectors capable of catalyzing modernization; current approach yields diffuse, uncoordinated, enterprise-specific interventions.
- Principles:
  - Focus on sectors rather than individual enterprises.
  - Policy support should be limited in scale and duration (time-bound and financially limited).
  - Emphasize infrastructure improvements first, then targeted, limited government support.
- Empirical note:
  - Efforts to promote textile exports to US/EU have yielded about US$3 million per annum.
  - Larger surge in manufactured exports to regional markets (Rwanda, Sudan, DRC) has occurred with limited active government intervention: from close to zero in late-1990s to over US$20 million per month in 2006.

3) Export Competitiveness
- Objective: sustain recent pick-up in exports (including manufactures).
- Policy instruments considered and trade-offs:
  - Tax breaks for exporters: revenue loss → wider fiscal deficit → lower domestic savings → undermines a competitive real exchange rate; benefits exporters but not import-competing industries.
  - Attempted nominal exchange rate depreciation by Bank of Uganda: without lower fiscal deficit (higher domestic savings) depreciation will not stick and risks higher inflation.
- Overarching trade-off: need for fiscal prudence to sustain a competitive real exchange rate vs. need for fiscal space to finance infrastructure and social spending.
- Government policy to pursue targeted gradual medium-term fiscal consolidation while reorienting spending toward infrastructure viewed as appropriate.
- Additional policy notes:
  - Improve measures to monitor competitiveness and export growth.
  - Prioritize public investment where private provision is limited or delayed; maintain prudent fiscal stance to avoid undermining tradables competitiveness.

### VI. Conclusions
- Uganda’s 20-year growth performance is impressive given weak fundamentals and exogenous shocks; private investment high by African standards; export diversification notable (non-traditional exports ≈ 60 percent of total exports vs. 20 percent in 1995).
- Key policy adjustments prioritized:
  - Aggressive focus on strengthening infrastructure (roads and electricity).
  - Development of a focused growth-cum-industrialization strategy with sectoral focus and limited, time-bound support.
  - Enhance export competitiveness, including targeted medium-term fiscal consolidation.
- Reform stance: build on successful market-oriented framework, avoid undermining gains, but address infrastructure, sectoral strategy, and tradables competitiveness within trade-offs highlighted.

*Source: IMF Working Paper — "2.  Economic Potential and Initial Endownments" (excerpt provided).*

### 1.    Per Capita Real GDP ..............................................................................................

### _wp08231 - 1.    Per Capita Real GDP ..............................................................................................

### Major themes: Per capita income and growth
- 1.    Per Capita Real GDP ..............................................................................................5
- 2.    Per Capita Real GDP Growth .................................................................................8
- 3.    Average Real Per Capita GDP Growth in Developing Countries, 1990–2007 ......8
- 5.            Per            Capita            Income and Growth.............................................................................12
- 16.  Dependency Ratio .................................................................................................21

### Major themes: Distributional and social outcomes
- 4.    Economic Growth and Poverty Reduction .............................................................9
- 21.  Infant Mortality and Per Capita Income ...............................................................29
- 18.  Life Expentency ....................................................................................................26

### Major themes: Sectoral structure and urbanization
- 6.            Sectoral            Composition            of GDP, 1990/91 and 2005/06 ..........................................11
- 7.    Share of Industry and Services inTotal Output.....................................................13
- 8.    Share of Urban Population....................................................................................14

### Major themes: Financial structure, savings, and investment
- 9.    Indicators ofFinancial Deepening.........................................................................15
- 10.  Savings and Investment ........................................................................................16 
- 24.  Private Investment in 1990 and 2005....................................................................37

### Major themes: Trade, external balances, and exchange rates
- 11.  Export Performance ..............................................................................................18
- 12.  Trade Intensity in 1990 .........................................................................................19
- 13.  Trade Intensity in 2005 .........................................................................................19
- 14.  Overvaluation........................................................................................................20
- 15.  Real Exchange Rate and Per Capita Income 1982–2005......................................20
- 17.  Trade and Current Account Blances .....................................................................23

### Major themes: Institutions, governance, and public finance
- 19.  Institutions and Income in 1990............................................................................28
- 20.  Institutions and Income in 2005............................................................................28
- 22.  Government Spending ..........................................................................................33

### Major themes: Comparative country indicators and case studies
- Tables
  - 1.  Indicators of Fundamental Country Attributes
- 23.  Selected Indicators for Uganda and Ethiopia........................................................35

*Source: _wp08231 - 1.    Per Capita Real GDP ..............................................................................................*

### 2.  Economic Potential and Initial Endownments

### 2.  Economic Potential and Initial Endownments

### I. Introduction and Summary
- Uganda registered one of the most impressive economic turnarounds of recent decades after turmoil following General Idi Amin’s power grab in 1971.
- Growth drivers since the late-1980s: peace, lower taxes, and improved administration of justice (reasonably independent judiciary, improving parliament, vibrant media, active civil society organizations).
- Aggregate outcomes:
  - Average real GDP growth between 1990 and 2007: 7½ percent.
  - Poverty fell from 55 percent in 1993 to 31 percent in 2006.
- Policy dilemma: strong growth and macro stability have not led to significant economic transformation and industrialization, prompting ad hoc and enterprise-specific interventions.
- Paper’s three questions:
  - To what extent has growth been accompanied by economic transformation? Main finding: some transformation but from a lower base and at a slower pace than “sustained growth” (SG) countries.
  - Why has transformation been limited? Considerations include weak fundamentals (geography, human capital, institutions), limited openness to trade (including potential aid-induced Dutch disease effects), the balance between state and markets, and globalization (“rise of China”).
  - What next for policies? Main priorities argued: improve infrastructure (roads and electricity), develop a focused growth strategy (sectoral focus, limited/time-bound support), and improve export competitiveness while balancing reliance on foreign aid and external competitiveness.

### II. The Stylized Facts of Uganda’s Recovery
- Growth performance and resilience:
  - Real GDP growth averaged close to 7½ percent between 1990 and 2007; rest of SSA averaged 3 percent.
  - Per capita growth between 1990 and 2007: Uganda 3¼ percent; Sub-Saharan Africa 1 percent.
  - Sustained growth duration: about 20 years.
  - Growth effectiveness at poverty reduction: poverty from 56 percent in 1993 to 31 percent in 2006.
- Composition and drivers:
  - Much early growth driven by factor accumulation: capital accumulation explained 85 percent of output increase during 1986-2003 (Mikkelsen, 2005); productivity contribution was negligible.
  - Macroeconomic stabilization: inflation reduced from well over 100 percent in the 1980s to single digits in the early 1990s; black market premium for foreign exchange eliminated by mid-1990s; trade barriers reduced and liberalization across sectors.
- Shortcomings:
  - Recovery mainly reversed earlier decline; per capita income only reverted to previous peak around 2000.
  - Perception of limited industrialization and structural transformation despite strong growth.

### III. Economic Transformation
- Comparative approach: Align Uganda’s take-off year as 1990 and compare transformation indicators with SG countries (sample: Chile (1986), China (1978), Dominican Republic (1969), Egypt (1976), Indonesia (1967), Korea (1962), Malaysia (1970), Singapore (1969), Taiwan Province of China (1961), Thailand (1960), Tunisia (1968), Vietnam (1985)).
- Per capita income and growth:
  - At take-off Uganda’s per capita income was well below SG average; average SG per capita income was 2½ times Uganda’s.
  - Subsequent growth rates: SG countries averaged 5½ percent versus Uganda’s 3 percent.
  - Fifteen years after acceleration: SG countries’ per capita income increased by 100 percent; Uganda’s increased by 60 percent.
- Sectoral composition:
  - Services replaced agriculture as largest sector; industry share rose from 12 percent in 1990/91 to 24 percent in 2005/06.
  - Share of manufacturing within industry broadly unchanged at some percent of GDP (text indicates an unspecified percent; preserve original phrasing: "some percent of GDP").
  - Uganda’s industrialization remains well below SG early-takeoff levels; transition out of agriculture has been toward services as much as industry.
- Urbanization:
  - Urban population share around 12 percent in 2005; low compared with SG take-off share close to 40 percent and low even by SSA average (~35 percent in 2005).
- Financial deepening and credit:
  - Ratio of financial liabilities to GDP about a third of SG take-off levels.
  - Private sector credit to GDP in Uganda around one-eighth of SG levels.
- Savings and investment:
  - Savings in Uganda about 9 percent of GDP (current); investment about 21 percent of GDP (current).
  - These are lower than SG averages but comparable with some low-savings SG cases (Dominican Republic and Egypt).
- Openness and exports:
  - Export-to-GDP at start of growth episode: less than 5 percent for Uganda vs. SG average around 15 percent.
  - Fifteen years on: SG average exports doubled; Uganda's goods exports stabilized around 10 percent of GDP.
  - Manufacturing exports to GDP in Uganda much lower than SG countries; only Indonesia among SGs had lower manufacturing exports immediately after acceleration.
  - Cross-country regressions controlling for determinants indicate Uganda’s openness in 1990 and 2005 are below predicted values but coefficients are not statistically significant.
- Real exchange rate:
  - Price-level-based indicator shows sharp overvaluation through late-1980s and some overvaluation in mid-1990s; SG countries showed consistent undervaluation in take-off periods.
  - Uganda’s REER very volatile in 1980s, more stable and more depreciated since 1990s.
- Demographics:
  - High population growth rate around 3½ percent; dependency ratio much higher than SG countries.
  - Life expectancy around 50 years (recent recovery from low 40s in mid-1990s); SG average at take-off was 57 years.
- Net assessment:
  - Some transformation has occurred (industrialization, savings, investment improved; export diversification increased with non-traditional items ≈ 60 percent of exports versus 20 percent in 1995).
  - However, Uganda follows SG paths from a lower base and slower pace; tradables sector performance and persistent trade/current account deficits (trade deficit widened to around 15 percent of GDP after early-1990s external financing eased) remain concerns.

### IV. Explaining the Record
- Framework: Consider four families of explanations—fundamentals (initial endowments), aid-induced Dutch disease (openness/effects of aid), policy balance between state and markets, and globalization (rise of China).

A. Fundamentals
- Geography and human capital:
  - Uganda is land-locked (distance from coastline 969 km versus SSA average 526 km in Table 1).
  - High disease burden (malaria-prone share of territory 100 percent in table), high ethnolinguistic fractionalization 0.90.
  - Life expectancy around 50 years vs. SG take-off average 57 years; average years of schooling in Uganda as of 2000: 3.5 years; SG average in 1985: 5.2 years.
- Institutions and state capacity:
  - Institutional indicators improved from being below predicted in 1990 to around or above predicted by 2005 (Heritage Foundation, Economic Freedom, World Bank governance indicators).
  - Infant mortality and other administrative-capacity proxies broadly around where per capita income would predict.
  - Regression (dependent variable: log of GDP) results (Table 2):
    - Institutions coefficient: 0.05 (t-stat 8.01) in 1990 and 0.10 (t-stat 9.09) in 2005 (*** significance).
    - Openness coefficient: -0.00 (t = -1.35) in 1990 and -0.00 (t = -1.57) in 2005.
    - Geography coefficient: -0.16 (t = 2.19)** in 1990 and -1.03 (t = -1.30) in 2005.
    - Uganda dummy: -0.00 (t = -0.00) in 1990 and -0.62 (t = -0.96) in 2005.
    - R-Square: 0.57 (1990) and 0.67 (2005); observations: 59 (1990), 57 (2005).
  - Conclusion: fundamentals-matter-most argument has appeal but does not fully explain Uganda’s performance; policy implications limited because many fundamentals are persistent and slow-moving.

B. Openness (Aid and Dutch Disease considerations)
- Aid flows channeled through government averaged around 10 percent of GDP between 1996 and 2005.
- Mechanism: large aid inflows can appreciate the real exchange rate, bid up nontradable prices, and reduce tradables sector competitiveness (Dutch Disease).
- Empirical note: evidence of economically adverse effects of aid on activity in Uganda is difficult to detect; recent REER and price indicators do not suggest current overvaluation, and export growth has picked up in recent years.
- Policy approach:
  - Government’s stated policy: re-orient spending toward infrastructure and gradual reduction of fiscal deficit over medium-term to ameliorate adverse effects of aid on tradables.
  - Trade-offs: aid required to build infrastructure and human capital, but can exert appreciation pressures; careful monitoring of competitiveness and exports is necessary.

C. Policies (State vs. Market debate)
- Critique of pro-market reforms: in absence of strong institutions and infrastructure, markets may allocate inefficiently; calls for more active “developmental state” interventions.
- Counterpoints:
  - Uganda’s growth under pro-market reforms has been stronger than pre-reform state-led period.
  - Size of the state (government spending to GDP) has not declined; Uganda’s ratio of government spending to GDP rose since late-1980s and plateaued circa 2000.
  - Comparative indicators: tax revenue to GDP around 13½ percent in Uganda vs. 16½ percent in Ethiopia (used as context for state capacity).
  - Outcome comparisons: between 1995 and 2005, per capita income growth: Uganda 3 percent vs. Ethiopia 2 percent; Uganda less volatile growth, higher private investment and domestic savings.
- Conclusion: difficult to conclude Uganda got the market-state balance wrong; current policy framework has delivered robust outcomes though gaps remain.

D. Globalization (Rise of China)
- Potential positive effects: higher commodity prices and increased FDI and aid from China.
- Potential negative effects: China’s competitiveness and exchange-rate strategy could delay migration of labor-intensive manufacturing to Africa (risk that Africa “missed the boat”); China’s rise may close off low-end manufacturing opportunities.
- Net effect on welfare in Uganda likely mixed; competition at micro-level (locations, firm environment, access to finance, skilled labor, connectivity) matters.

### V. What Next? (Policy Priorities and Trade-offs)
- Overall judgment: current policy framework has delivered notable achievements (sustained growth, private investment high by African standards, export diversification). Reforms should be complementary to this framework and avoid undermining gains.
- Three first-order interventions recommended:

1) Infrastructure (roads and electricity)
- Rationale:
  - Industry and modern agriculture are infrastructure-intensive; poor infrastructure tilts comparative advantage away from these activities.
  - Infrastructure is an essential, non-substitutable input (electricity interruptions force use of costly back-up generation).
  - Infrastructure expands markets and facilitates trade and production.
- Observations:
  - Government has increased infrastructure spending in recent budgets, but institutional frameworks for delivering large-scale railway and energy projects are questioned.
  - Example: Bujagali dam took close to 7 years from inception to construction start, with significant government inducement; Uganda’s single railway line to the sea is over 100 years old.

2) Focused Growth Strategy
- Need: identify and support 3–4 sectors capable of catalyzing modernization; current approach yields diffuse, uncoordinated, enterprise-specific interventions.
- Principles:
  - Focus on sectors rather than individual enterprises.
  - Policy support should be limited in scale and duration (time-bound and financially limited).
  - Emphasize infrastructure improvements first, then targeted, limited government support.
- Empirical note:
  - Efforts to promote textile exports to US/EU have yielded about US$3 million per annum.
  - Larger surge in manufactured exports to regional markets (Rwanda, Sudan, DRC) has occurred with limited active government intervention: from close to zero in late-1990s to over US$20 million per month in 2006.

3) Export Competitiveness
- Objective: sustain recent pick-up in exports (including manufactures).
- Policy instruments considered and trade-offs:
  - Tax breaks for exporters: revenue loss → wider fiscal deficit → lower domestic savings → undermines a competitive real exchange rate; benefits exporters but not import-competing industries.
  - Attempted nominal exchange rate depreciation by Bank of Uganda: without lower fiscal deficit (higher domestic savings) depreciation will not stick and risks higher inflation.
- Overarching trade-off: need for fiscal prudence to sustain a competitive real exchange rate vs. need for fiscal space to finance infrastructure and social spending.
- Government policy to pursue targeted gradual medium-term fiscal consolidation while reorienting spending toward infrastructure viewed as appropriate.

- Additional policy notes:
  - Improve measures to monitor competitiveness and export growth.
  - Prioritize public investment where private provision is limited or delayed; maintain prudent fiscal stance to avoid undermining tradables competitiveness.

### VI. Conclusions
- Uganda’s 20-year growth performance is impressive given weak fundamentals and exogenous shocks; private investment high by African standards; export diversification notable (non-traditional exports ≈ 60 percent of total exports vs. 20 percent in 1995).
- Key policy adjustments prioritized:
  - Aggressive focus on strengthening infrastructure (roads and electricity).
  - Development of a focused growth-cum-industrialization strategy with sectoral focus and limited, time-bound support.
  - Enhance export competitiveness, including targeted medium-term fiscal consolidation.
- Reform stance: build on successful market-oriented framework, avoid undermining gains, but address infrastructure, sectoral strategy, and tradables competitiveness within trade-offs highlighted.

*Source: IMF Working Paper — "2.  Economic Potential and Initial Endownments" (excerpt provided).*

### REFERENCES

### _wp08231 - REFERENCES

### Full reference list
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- Aizenman, Joshua and Mark M. Spiegel, 2007. "Takeoffs,” NBER Working Papers 13084.

- Berg, Andrew, Jonathan D. Ostry, and Jeromin Zettlemeyer, 2006, “What Makes Growth Sustained?” IMF Working Paper 08/59.

- Besley, Timothy and Torsten Persson, 2007. "The Origins of State Capacity: Property Rights, Taxation, and Politics," NBER Working Papers 13028.

- Blattman, Christopher. Jason Hwang, and Jeffery G. Williamson, 2006, “Winners and Losers in the Commodity Lottery: The Impact of Terms of Trade Growth and Volatility in the Periphery, 1870-1939,” forthcoming, Journal of Development Economics

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- Collier, Paul, 2007, “Growth Strategies for Africa”, paper prepared for the Spence Commission on Economic Growth, Centre for the Study of African Economies, Oxford University.

- Collier, Paul and Stephen O’Connell, 2006, “Opportunities and Choice”, Chapter 2, in Political Economy of Economic Growth in Africa, 1960 – 2000, Volume 1, Cambridge University Press.

- Dixit, Avinash, 2006. "Evaluating recipes for development success," Policy Research Working Paper Series 3859, The World Bank

- Dollar, David, 2007. "Asian century or multi-polar century?" Policy Research Working Paper Series 4174, The World Bank.

- Easterly, William and Ross Levine, 2002. "Tropics, Germs, and Crops: How Endowments Influence Economic Development," NBER Working Papers 9106.

- Easterly, W., 2006, “Reliving the 50s:  the Big Push, Poverty Traps, and Takeoffs in Economic Development” Journal of Economic Growth, Vol. 11(4), pages 289-318.

- Easterly, William, 2007, “How the Millennium Development Goals are Unfair to Africa” Professor of Economics, NYU Visiting Scholar, Brookings Institute.

- Eichengreen, B., 2007, “The real Exchange Rate and Economic Growth,” mimeo, University of Califonia, Berkeley.

- Eifert, P.B., 2007, “Infrastructure and Market Structure In Least-Developed Countries,” mimeo, University of California, Berkeley.

- Frankel, Jeffery, 2005. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," NBER Working Papers 11274.

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*References as listed in the source PDF _wp08231 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08231.pdf_