Studies conducted by the World Bank in the 1980s and 1990s concluded that Africa was not doing well economically and socially largely because of distortions in the domestic domain. In its 1994 report entitled Adjustment in Africa: Reforms, Results, and the road ahead, the Bank noted that although there was no single explanation for Africa’s poor performance, economic decline was due in large part to poor domestic policies at macroeconomic and sector levels. The distortions were compressed into state intervention in production and economic regulation; overvalued exchange rates; large and prolonged budget deficits that undermined macroeconomic stability needed for long-term growth; protectionist trade policies and government monopolies through nationalized enterprises and financial institutions that reduced competition vital for increasing productivity; and a bias against exports especially of agricultural produce through heavy taxation.
The Bank recommended a new development paradigm (structural adjustment) to correct these policy distortions. It called for the state to be limited to the provision of basic services and a stable policy environment; promotion of exports with a focus on agriculture; promotion of private sector; maintenance of macroeconomic stability; and avoidance of overvalued exchange rates.
The success of the new paradigm would depend largely on keeping inflation low, exchange rates competitive and budget deficits sustainable. Thus, structural adjustment would contribute to development by establishing market-friendly incentives for the promotion of economic sustainability and poverty reduction.
The World Bank warned that the long term goal is to increase the standard of living by achieving sustained increases in health, education, material consumption and environmental protection. This would require good governance, appropriate infrastructure, institutions and better-trained people besides an appropriate macro-economic framework.
The NRM government which for eighteen months had refused collaboration with the World Bank and the IMF to avoid stiff conditionality which had severely constrained Obote II government’s effort to balance demand and supply, ultimately agreed to cooperate when it realized that without agreements with the IMF and the Bank, it would not get funding from major western donors. Accordingly, the government entered into agreement with the IMF in 1987.
At the 1989 national seminar on Uganda’s economy since 1986, the permanent secretary, Ministry of Planning and Economic Development stressed that the government needed to control government deficit financing and excessive monetary expansion. It also needed to increase and diversify exports and manage foreign debt. He concluded by stressing that, inter alia, the two most important economic achievements are the defeat of inflation and boosting exports to be realized through a balanced budget and a realistic exchange rate otherwise the rest of economic policy would be doomed to failure.
Following the seminar and the intensive campaigns that preceded it, most Uganda policy makers believed that the benefits of economic growth would be equitably distributed to all classes and regions through the invisible hand of the market forces. The issues of good governance, social sector development and environmental protection received rhetoric attention at best.
As the implementation of structural adjustment progressed, the signs of a mal-functioning market economy system began to show through increasing unemployment, under-nutrition, environmental degradation, income inequality and slow progress in poverty reduction. Studies showed that the rapid economic growth was due in large part to a recovery from years of instability (M. Kevane 2004) rather than to economic policy changes. Besides, incomes remained low and inequitable. Still, the government continued to focus on economic growth and per capita GDP growth rates, inflation reduction to stable levels (through high interest rates that suffocated small and medium-sized enterprises), a viable balance of payments position so that deficits can be funded on a sustainable basis and export diversification to earn adequate foreign currency (P. Langseth et al, 1995).
Notwithstanding donor praise for Uganda’s macro-economic stability, the government came to realize presumably for political reasons especially the upcoming 2011 elections that structural adjustment had failed to create jobs, reduce poverty appreciably, put food on the table, etc. In September 2009, it took a bold step and launched a new development paradigm (a new national development plan) to address imperfections of the invisible hand. In so doing, the NRM government, like other governments in the world, declared the demise of structural adjustment.