The end-of-year (2008) stories have removed any lingering doubt about the depth and extent of poverty in Uganda. Reports in Weekly Observer January 14, 2009 regarding an increase in child sacrifice have underscored absolute poverty as the single most important factor.
Since 1987 Uganda has pursued a development policy of neo-liberalism with a focus on inflation control through a combination of high interest rates and reduced quantity of money in the economy – a job that the central bank has executed pretty well.
However, high interest rates have made it very difficult for small and medium-scale enterprises to borrow and invest in labor-intensive enterprises.
The deliberate policy of reduced public sector employment to balance the budget has also contributed to excess workers looking for work Private investment which it was hoped would drive economic growth and absorb job seekers has not happened as expected – hence declining growth, rising unemployment and deepening abject poverty.
The Keynesian model of aggregate demand was implemented following the publication in 1936 of Keynes’ book titled “The General Theory of Employment, Interest, and Money” in the midst of the Great Depression. At that time the orthodox view that the economy would adjust itself to full employment had failed.
Keynes recommended state intervention to stimulate the depressed economy. He argued that aggregate demand – sum of spending by public consumers, producers on investment and government – was the determinant of the levels of national income and employment through an activist fiscal policy – monetary policy was given a lower ranking because of its limited effectiveness.
Post-WWII governments adopted the Keynesian model. In the United Kingdom Beveridge’s recommendations in his report “Full Employment in a Free Society” of 1944 formed the basis for Labor and Conservative governments’ employment of aggregate demand strategies to stimulate economic growth and full employment until the late 1970s when Margaret Thatcher moved the country to monetarism with a focus on inflation control.
In the United States, a Keynesian economic model came into force when the president reoriented his economic strategy in 1938 – when the Depression deepened – to embark on a deliberate program of deficit spending – he had earlier insisted on balancing the budget. Keynesian economists were instrumental in the promotion of the Employment Act of 1946. By this Act, the United States Federal government took on the responsibility for maintaining maximum employment, production, and purchasing power. Between 1939 and 1944, USA’s output almost doubled and unemployment fell drastically from 17 percent to slightly over 1 percent. A Council of Economic Advisors was created in the president’s office to prepare reports on the state of the economy.
During the Kennedy and Johnson administrations, a Keynesian strategy was adopted through a tax cut to stimulate economic growth and reduce unemployment through deficit financing. Even Nixon, a Republican president, proclaimed that “We are all Keynesians now”.
Americans accepted government responsibility to ‘fine tune’ the economy through fiscal and monetary policy through the Federal Reserve to avoid economic slowdowns and overheating respectively.
The stagflation of the 1970s – the coexistence of high unemployment, rising inflation and stagnant economy – could not be addressed within the framework of the Keynesian model. Monetarists seized the opportunity to argue that the Keynesian model had caused stagflation by emphasizing consumption expansion at the expense of savings and capital formation.
The doctrine of monetarism gained ascendancy through limiting the quantity of money in the economy – a responsibility that rested with central banks acting independently of governments. The Reagan’s and Thatcher’s administration in USA and UK respectively emphasized supply over demand side strategies.
Since 1987, the Uganda government has followed the same policy of focusing on inflation control at the expense of employment within the framework of the Washington Consensus.
The failure of 30 years’ reliance on market forces has resulted in the abandonment of free markets principles – to save the free market system from extinction – and a return of the Keynesian economic model to deal with the economic recession and mounting unemployment challenges.
All over the world governments are intervening in national economies. With Uganda’s economy slowing and unemployment rising, it would be wise for the NRM government to follow others and wholeheartedly implement a state intervention strategy through public works without delay.