Tackling Uganda’s employment challenge
Originally posted on Centre for Development Alternatives.
This post is the third of a 3-part series on Uganda’s employment challenge.
The creation of decent employment at scale must be Uganda’s number one priority. UBOS’ most reliable statistics tell us that large-scale underemployment and vulnerable employment in the informal sector affect the majority of labour force participants, there are critical and growing unemployment levels in Kampala, and 7.9 million working people are stuck in a poverty trap of low-productivity subsistence farming. With one of the fastest-growing working-age populations in the world, the magnitude of Uganda’s employment challenge is set to grow exponentially in the coming decades.
Just like the nature of the employment challenge, the factors contributing to it also require a reality check. The underlying factors giving rise to the observed lack of decent employment, and consequently its best-suited remedies, have been curiously misconstrued. The dominant public discourse on Uganda’s employment challenge essentially places the blame on the victim. We are repeatedly told by the media, public sector sources and civil society alike, that Uganda’s unemployed youth (to which we should add underemployed, vulnerably employed and excluded youth) do not possess the right skills and attitudes to get good jobs.
This argument has two main elements. The first – the “skills mismatch” argument – basically asserts that young people are busy acquiring skills that are not needed in the economy (e.g. social sciences) and not acquiring the skills that are needed (e.g. vocational skills). The second element is epitomised by the mantra that we need “job creators, not job seekers”, which essentially tells any young person lamenting the lack of job opportunities to go and create their own job instead of sitting around asking for one. Underlying both of these arguments is a view about the attitudes of young people who “feel too precious for TVET schools or agriculture” and “lack an entrepreneurial mindset”.
There are a few worrying aspects to this dominant viewpoint.
First, these arguments imply a concerning vision for the country’s labour market. The “job creators” argument implies that we want an economy in which virtually every young person becomes a self-employed plumber, welder, electrician, hairdresser, repair technician, farmer, and so on. This implied vision is markedly different from the National Planning Authority’s Vision 2040, which recognises the need for deep economic transformation, not just the creation of more microentrepreneurs. The “job creators” argument is a distraction from the complex structural issues that need to be tackled – and that young voters should be calling for. The advanced economies of Europe, East Asia and North America were not built on micro-entrepreneurship. It is well documented that the rate of self-employment shrinks with economic growth (shown here by Gallup across 135 countries). The creation of decent jobs is driven, almost everywhere, by the growth of large firms and SMEs. When firms grow, they hire more people. And as firms grow, they tend to become more productive and efficient, which makes them able to pay better wages and create more value and demand in the economy. This, in turn, has a multiplier effect on job creation. What the economy needs, therefore, is more firm growth, not more self-employment.
Second, the focus on workers’ skills and attitudes unhelpfully places the debate’s starting point on the labour supply side when it should be on the labour demand side. “Labour supply” refers to the labour force – the people who are able to work and seeking for work. “Labour demand” is constituted by the presence of firms – from microenterprises to large corporations – that are able and willing to pay for labour (including the founder’s own labour in the case of a microenterprise).
“Fixing” the labour supply side will do nothing to improve the situation unless there is unmet labour demand. It is true that there is some unmet labour demand, from vacant government teaching posts in upcountry districts to a shortage of welders who have international oil & gas sector certifications. But it would be a mistake to think that filling this unmet demand would solve the country’s employment problems. Instead, the key issue is a lack of labour demand: in painfully blatant terms, there simply are not enough decent jobs available in the economy. World Bank data shows that Uganda’s labour force grew at a compound rate of 3.8% in the last five years, resulting in 606,000 new jobseekers but only 147,000 new formal jobs in 2017.
Figure 1: New Formal Job Deficit, 2013 – 2017
Horizontal and Vertical Action for Job Creation
There are two major pathways towards labour demand growth. First, labour demand will rise if more SMEs and large firms emerge, survive and grow, creating more decent jobs. But in the short- to medium-term, microenterprises (both on-farm and off-farm) are set to continue employing most of the labour force, even if a manufacturing miracle occurred. The second pathway for labour demand to grow (albeit not for decent jobs) is for the country’s large base of on-farm and off-farm microenterprises to achieve higher productivity and thus higher incomes for their owners and workers.
Both of these pathways have massive untapped potential. The SMEs and large firms that have grown the most are largely in services sectors that are not labour-intensive – it is the banks, telecoms and real estate tycoons that create a few well-paying jobs. For smallholder farmers, productivity is low and stagnant. And off the farm, new microenterprises are entering the market at a high rate, but they are dying just as fast, and few manage to grow into medium or large businesses.
A two-track approach is needed to bring about broad-based decent employment growth. The first track – the horizontal track – is to improve the fundamentals that affect the entry of any new firm and the growth prospects of existing firms. The second track – the vertical track – is to target a few high-growth-potential, labour-intensive economic sectors and lift the specific binding constraints on growth in those sectors.
The Horizontal Track: Improving the Fundamentals
First among the fundamentals is physical infrastructure. According to Jeremy Rifkin, every economic transformation in history has relied on a triple revolution in the realms of energy, mobility, and communication, which together provide an economy’s “general-purpose infrastructure”. Energy powers all economic production, while mobility and communication infrastructure enable the flow of people, products and information in the economy. Having realised significant progress on the road network, mobile and internet connectivity, and electricity generation, some of Uganda’s grand challenges ahead include:
- improving feeder roads to reduce the cost of transporting agricultural produce to markets;
- laying a modern internet infrastructure to radically decrease the cost of digital communication;
- upgrading the rail network linking Uganda to neighbouring countries and ports;
- preventing an impending biomass energy supply crisis; and
- upgrading the power transmission and distribution system to increase power access, reliability and affordability for firms.
CDA’s report on energy for economic transformation covers the subset of constraints and opportunities that are energy-related in detail.
Firm growth is also inextricably tied with the characteristics of urban development. The International Growth Centre’s Cities That Work initiative presents the compelling argument that cities have the potential to “enable firms and workers to cluster together to perform a ‘miracle of productivity’… [driven by] scale and specialisation…”. But fostering this clustering of firms and workers requires physical connectivity driven by effective land-use and transportation systems, which most African, let alone Ugandan, cities have not achieved. As a result, “employment is predominantly in single-person firms and focused on basic local service provision”. Uganda’s capital, and equally importantly its secondary towns and cities, have the potential to enable such a miracle of productivity that would generate decent employment at scale, but much work needs to be done to achieve this.
Beyond physical infrastructure, firms thrive when they operate within a strong entrepreneurship ecosystem. Entrepreneurship ecosystems are the environments in which entrepreneurs operate – from the media and cultural factors that shape attitudes towards entrepreneurship, to universities that train entrepreneurs to the incubator programmes that support the launch of new firms, to the investors and banks that finance expansion, to the service providers that support business development, to the government regulations that either hinder or foster firm growth. CDA’s recent study investigated the entrepreneurship ecosystems of Kampala and Gulu and designed a set of priority action pathways to bolster these ecosystems. The study looked particularly at small businesses with a high growth potential. Three areas that must be tackled in order to unlock the growth potential of these small firms are the tax system, early-stage finance, and management skills.
The Vertical Track: Unleashing Targeted High-potential Sectors
The second – vertical – track aims at identifying and then lifting the most binding constraints on growth and productivity in specific targeted sectors (or “verticals”).
The first step is to identify sectors that meet two criteria: high growth potential and high direct and indirect job and income creation potential.
In somewhat oversimplified terms, high-growth-potential sectors are those whose products and services have a large domestic, regional or global demand, and where Ugandan firms stand a realistic chance of expanding existing capabilities and using existing resources to competitively produce and sell those products and services. Sectors that have a high job-creation potential are labour-intensive and/or generate a large number of jobs indirectly, for instance in firms along the supply chain or in firms providing services to workers in the sector in question.
First, agriculture employs over two thirds of the workforce, so in the short to medium term, labour market outcomes will rise and fall with agriculture – particularly the productivity of smallholders. But agricultural productivity is also the crucial first step in economic transformation more broadly. Within agriculture, there are general interventions such as improving the road network, access to information and access to agricultural inputs (such as seeds and fertilizers). But there is also scope and need for vertical action focused on specific high-growth-potential agricultural value chains. For instance, Tanzania, Kenya and Ethiopia have seen significant success with cut-flowers for export, and Uganda has large untapped potential in the fruit, coffee and horticulture value chains.
Second, there is massive untapped potential in certain manufacturing subsectors. Two major trends are sure to affect the growth potential of manufacturing in Uganda and the rest of the region: rising labour costs in China and rising consumer demand in Africa. As China’s production costs and wages rise (Chinese wages for unskilled workers are projected to increase four-fold in the next decade), China’s manufacturers will be forced to shift to higher-value outputs. The Chinese economy could lose or actively offshore a whopping 85 million unskilled manufacturing jobs, which presents an opportunity for African countries. The second trend is the rapid growth of Africa’s consumer market. Total consumer spending in Africa has tripled in real terms since 1990 and is set to continue growing exponentially, with rapidly growing young, connected and urban middle classes across the continent. In addition, regional integration (e.g. through the East African Common Market and the Continental Free Trade Agreement) creates the promise of scale and specialisation necessary to make companies more productive and competitive. Being close to the consumer is a strong advantage in many manufacturing subsectors. The production of goods for consumers in regional neighbours and the rest of the continent presents a big opportunity for firm growth and job creation in Uganda.
Figure 1: Sub-Saharan Africa Consumer Expenditure
Source: Accenture (2011). The Dynamic African Consumer Market: Exploring Growth Opportunities in Sub-Saharan Africa
Priority manufacturing subsectors can be identified based on the above-mentioned demand dynamics, Uganda’s existing production capabilities and latent comparative advantage, and the subsectors’ direct and indirect job creation potential.
Each high-potential subsector or value chain faces very unique constraints – from storage facilities to technical skills, from transport costs to trade restrictions – which can be tackled through targeted action. It is necessary to look deeper than the crosscutting constraints often named in studies like the World Bank Enterprise Surveys. Take electricity, often listed as a top obstacle for firms: for a cold storage provider in Kampala, power can constitute more than half of the firm’s total operating expenditure, while for a chemicals manufacturer it represents less than 1% of operating expenditure. It is clear, then, that the cost of power is likely to be a binding constraint for the cold storage firm and very unlikely to be a gamechanger for the chemicals producer. Another example of the sector-specificity of firm growth constraints is labour force skills. French energy giant Total has plans to train 3,000 welders to meet specific international oil & gas sector standards for the construction of Uganda’s oil pipeline. Currently, not a single Ugandan welder meets these standards. The oil & gas sector faces very specific labour skills constraints that must be lifted for it to progress. Skills development initiatives should focus on equipping Ugandan workers with the skills needed in those priority economic subsectors where skills are a binding constraint to firm growth and labour demand. Only then will more skills lead to more employment, because one of the key factors hampering firm growth will have been tackled.
This article has described the broad contours of what a coherent strategy to tackle Uganda’s employment challenge might look like. The economic details of such a strategy remain unclear: which subsectors to focus on, which infrastructure projects to prioritise, and so on. The social questions also remain largely unanswered: how can the most disenfranchised groups in society be given a fair chance to participate fully in Uganda’s economic transformation process; how can the disruptive force of structural change in the economy be managed so as to minimise displacement and suffering?
Finally and most importantly, the political questions need to be addressed. Who benefits from progress in certain sectors of the economy? What short-term rent-seeking interests are hindering progress in the economic areas discussed above. What will it take to shift the incentives of key public and private stakeholders (domestic and international) towards the long-term inclusive economic transformation needed to create decent employment at scale in Uganda? The public discourse around Uganda’s employment challenge would do well to stop expecting youth to create their own jobs and instead grapple with these deeper structural issues.
Cover photo: Meat roasters in Uganda / Flickr User youngrobv (CC License)