Friday April 15 2016

How weak is our economy if 30.6m Ugandans live on less than $3 a day?

By Fred K. Muhumuza

A friend tasked me to explain whether the growing number of roadside kiosks selling small quantities of charcoal, avocado and banana leaves signify continued reduction in poverty. For starters, we agreed that the days of measuring poverty using one dollar per day were long gone. Put mildly, Shs3,300 (one dollar) cannot meet the daily basic needs of a typical Ugandan.

Consider a person with the following daily costs: cheapest single meal (Shs2,000), transport (Shs3,000), communication (Shs1,000), medical (average of Shs1,000 per day), housing (average of Shs3,000 per day) for a house of Shs90,000 per month. The total was already Shs10,000 (three dollars) before we could account for paraffin and savings towards school fees, clothing, and basic household assets.

Poverty and vulnerability statistics in Uganda only cover up to two dollars a day with the later (Shs6,600) considered as middle income! To resolve the dilemma, I engaged a mathematical model (logarithimic) to project from one dollar (poverty at 19.7 per cent) and two dollars (poor and vulnerability at 63 per cent) and found three dollars corresponding to 88.3 per cent of the population. This means 30.6 million Ugandans could be earning less than three dollars a day. You do not have to be one of these millions to be affected as this represents economic and security risks to the country.

First, the multitude of poor people represents weak market demand that undermines businesses and banks that lent to them. The increase in non-performing loans can easily erode bank capital and cause liquidity stress. Generally, a weak banking system and poor business performance increases economic vulnerability that affects everybody.

Second, an economy with many poor people does not offer significant opportunities for businesses to create jobs. This is most critical for Uganda where growth is largely expected to come from infrastructure projects. Unless infrastructure complements primary production in agriculture, industry and services, it is likely to fuel jobless growth. It will simply represent an increase in the stock of national wealth.

If businesses cannot engage in production because the population is too poor to buy their products, then the economy will gradually move into a recession and possible stagnation.

Continued sluggishness of the global economy has forced countries to stimulate domestic demand – a possible reason why China relaxed the one-child policy. Uganda simply has too little demand to stimulate the required levels of growth.

Third, if the poor cannot generate sufficient consumption, then tax revenues will not support repayment of the growing national debt. Economists believe that potential investors shun an economy if they believe future tax obligations are likely to increase. If the population cannot afford to pay taxes, then future business taxes are bound to increase to provide for basic public needs and debt payment. A reduction in potential investors in a country with a growing debt and size of government is a recipe for slow growth and no jobs.

Finally, the economic stress due to inability to survive on even three dollars a day can push many poor people into opening roadside kiosks to look for an extra Shs3,000 per day. However, for other members of the population, it may translate into crime, political agitation and insecurity.

This is the reason we should all be concerned about inequality in a country where nearly 90 per cent of the people earn less than three dollars a day. There is no way the rich will sleep when the hungry poor are awake.

Dr Muhumuza is a development economist committed to inclusive growth.