TRADING WITH THE BRICS: Is Uganda Prepared?

Isaac Shinyekwa and Maria Nagawa

In 2003, Goldman Sachs projected that BRICS’ economic expansion was on track to overtake the G7 by 2040. Between 2002 and 2012, South Africa’s GDP had expanded by 41%, Brazil’s by 42%, Russia’s by 57%, India’s by 111%, and China’s by a whopping 170%. These countries have become increasingly important trade partners for low income countries. According to the United Nations Economic Commission for Africa, they accounted for 20% of total trade for low income countries in 2009, up from 7% in 1995. BRICS countries can also provide a new opportunity for Foreign Direct Investment (FDI), trade, development aid, and technology transfer and thus enable Uganda to better access supply chains that have higher chances of boosting export competitiveness, generating employment, and enhancing technological abilities.

Trade intensity between Uganda and BRICS has been relatively high since 1996. In 2001, Uganda’s exports to BRICS were only US$5.3 million but grew to US$120 million in 2013 whereas imports were worth US$73.46 million and US$1,041.2 million in 2001 and 2013 respectively. The bulk of trade exchanges gravitate more towards South Africa and India with a slow increase in trade intensity with China and Russia since the 2000s. Though studies show that there is significant complementarity between Uganda’s exports and Brazil’s imports, bilateral trade between the two countries remains largely untapped.

Unfortunately, Ugandan exports are less sophisticated than its imports from BRICS, signaling lower technology and capital intensity. Exports comprise mainly raw hides and skins, cotton, seeds, fruits, coffee, tea, tobacco, wood, and cocoa. In other words, goods that complement the manufacturing sector of the BRICS countries. The latter in turn export electronic equipment, pharmaceutical products, vehicles, machinery, footwear, and furniture, among others. An examination of these products shows that Uganda, if it industrialises, can locally manufacture a number of the products it imports from BRICS like pharmaceuticals, footwear, and furniture. In addition, it could transform its export basket to include more sophisticated goods that fetch higher prices on the international market.

This would require the development of the manufacturing sector. 

Manufacturing is key to economic development because it is the main source of innovation in modern economies, is a major conduit for diffusion of new technologies to other sectors, has backward and forward linkages with other sectors, and in Uganda especially, provides a potential stimulus for the growth of the agricultural sector. Moreover, it would help the country move away from commodities exports which are highly sensitive to price fluctuations and climate change. Studies of BRICS and other countries like Japan, Argentina, and South Korea also show that there is a high correlation between value added in manufacturing and income per capita. This is because there is higher productivity in manufacturing than in agriculture. Therefore, labour in the former sector can earn a higher wage. 

The weakness of Uganda’s manufacturing sector has debilitated economic development and contributed to the widening of the current account deficit, which stands at 10.8% of GDP and continues to grow. This is not sustainable in the long term. Although there has been modest growth in the sector, it still suffers low capacity utilisation, estimated at 50%, partly due to: credit rationing, limited skills, and inadequate infrastructure. Another danger Uganda faces by having a weak manufacturing sector is that better quality light manufacturing products from BRICS, in which Uganda is engaged, like footwear, pharmaceuticals, furniture, apparel, textiles, and plastics could outcompete locally manufactured goods on the domestic and international markets. This would deal a heavy blow to the nascent local manufacturing sector that still needs a lot of protection. Graph 1 and 2 below show Uganda’s top 3 primary products and light manufactured goods to its top 3 export markets in USD ‘000 in 2010.

 

Graph 1: Value of Uganda’s Top 3 Primary Exports to its Top 3 Markets (US$‘000)

Graph 2: Value of a Selection of Uganda’s Light Manufactured Goods to its Top 3 Markets (US$ ‘000) 

Graph 1 above shows that Uganda fairs poorly in comparison to its major competitors in its top 3 markets which are Germany, Sudan, and Italy for coffee; The Netherlands, Kenya, and South Korea for tobacco; and Indonesia, Portugal, and Malaysia for cotton. Its major BRICS competitors for these markets are Brazil and India, while for the rest of the world (ROW) they are USA, Australia, Peru, and Vietnam. Without increased productivity in the agricultural sector, Uganda cannot hope to ever compete favourably with these “behemoths”.

In graph 2 above, we see that Uganda has a competitive edge for iron and steel products in its top markets. It competes with India, South Africa, China (part of BRICS), Turkey, and Kenya for market share in DRC, Sudan, Burundi, and Rwanda. This could partly be because of proximity to these markets. However, for pharmaceuticals, whose production is more sophisticated, Uganda lags behind India, China, France, and Belgium for market share in Rwanda, Burundi, and DRC.

In conclusion, to gain the most out of its relationship with BRICS, Uganda should: use pro-competitive policy options in the manufacturing sector to ensure that the existing market niche is not wiped away; use FDI for technology transfer, adoption, and domestication to increase the productivity of all resource inputs; use her low wages relative to BRICS’ to position herself to becoming the next generation location of labour intensive light manufacturing; further develop infrastructure, especially the transport network, to enhance its competitive edge in the region; and encourage, as a matter of government policy, the importation of equipment and technology based goods to build the productive capacity of the local industry in order to manufacture diversified high value goods.


Isaac Shinyekwa is a Research Fellow and Maria Nagawa is a Research Associate at Economic Policy Research Centre