The Stages of Growth: When Governments Fail to Create Enabling Environments

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[Letter From New York]

Yoweri Museveni. The Ugandan dictator for the past 33 years has failed to create an enabling environment to nurture development. Photo: Facebook

 

For easy reference, let us assume that there is a country with scattered communities each one producing what it consumes with very little exchange among them through barter trade--say exchanging goats for salt or crops for iron products like hoes, machetes, spear heads, and other items. 

Because what they consume is less than the maximum they can produce using their labor and land, the factors of production are not fully utilized. Thus, there is surplus labor and surplus land. So how do these communities transition from subsistence to specialization, surplus production and trade within the country or with other countries?

Some initiative or something called enabling environment has to be undertaken by someone or entity, usually a government that provides information about the demand for the products that the communities can produce --say beans, corn, meat, iron products, and other items-- and sell beyond subsistence level. Transportation facilities like roads, railways, canals or ports have to be provided between the centers of production and of consumption. The producers of these goods must access things they want to buy with the income they have earned from the sales of their produce. 

They may want to purchase cement and corrugated iron sheets for their houses. They may want shoes. They may want beer. They may want banks to keep their money safely or to borrow from in order to start or expand business. Or they may want schools for their children.

Human beings are by nature enterprising. They will organize themselves individually or collectively to meet the demand and earn a profit. They will begin to specialize in different production or service activities and to hire beyond family labor. As mentioned already, they will need that critical enabling environment.

They will need basic education like reading, writing and arithmetic as well as training in skills. Regulations will also be necessary to ensure that employers don't exploit workers or service providers like banks, insurance or transport companies won't overcharge for their services. Law and order will be necessary to facilitate production, transport and trade and to resolve disputes.

All this will require planning of some sort because market forces have imperfections. The planning commission or ministry of planning and economic development will be needed initially under the leadership of the head of state or government. The planning commission will work with line ministries to ensure there is coordination of activities in a mutually reinforcing manner particularly in the areas of agriculture, industry, infrastructure, energy and commerce. For example, when the British colonial administration decided to industrialize the Uganda economy, it created the Uganda Development Corporation (UDC) to coordinate the relevant inputs.

The government also creates a central bank to ensure economic stability and full employment using largely monetary instruments like money supply and interest rates. Initially the government plays a bigger role in the economy especially in those areas unattractive to the private sector like infrastructure construction, energy production, education and healthcare but gradually it withdraws and focuses on defense of the country from external aggression, maintenance of law and order, providing infrastructure and energy and social services like education and healthcare as well as research and development (R&D).

Also in the early development stages agriculture dominates the economy in creating jobs and contributing to the national economy, the Gross National Income (GNI). As time passes, assuming the stages outlined occur, manufacturing industries --beginning with processing of agricultural produce and other raw materials-- and services contribute more to the economy and employment than agriculture. 

Farming technology reduces the demand for labor. Surplus labor shifts to non-farm activities and from rural to urban areas thereby reducing demographic pressure on agricultural land. Increased agricultural productivity through intensive use of the land reduces extensification methods of farming that destroy biological diversity and contribute adversely to thermal and hydrological regimes leading to environmental degradation, climate change and global warming.

In the end the economy and the people are transformed from subsistence to diversified production, exchange and consumption patterns and people move from rural to urban areas with increase in income generally; globally there are more people living in urban than in rural areas today. 

Technology development and human capital formation become the engine of growth rather than resource endowment and size of the population. However, for this to happen the state, the private sector and market forces must work together in a mutually reinforcing manner, not one replacing the other. What is the situation in Uganda? What is the situation in your own country?

New York based Eric Kashambuzi is an international economist, development consultant and human rights activist. 

 

 

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