Economic growth in Uganda: the contribution of factor accumulation and total factor productivity growth

Abstract

This study investigated the determinants of economic growth in Uganda using factor accumulation and growth accounting frameworks for the period 1982-2015. The study used the autoregressive distributed lag (ARDL) model to estimate the short- and long-run elasticities of the selected determinants of economic growth and the growth accounting framework to decompose the contribution of total factor productivity, capital and labour in economic growth. Using the ARDL model, the study found that the key determinants that positively determine economic growth in the short run were the initial level of GDP growth, government consumption and investment, while inflation, foreign aid and a policy dummy variable that represented structural adjustment programmes negatively impacted GDP growth. The study revealed that in the long run, trade openness, population growth, government consumption and investment positively influenced GDP growth. The results failed to show a significant relationship between trade openness, population growth and human capital accumulation and economic growth in the short run. The study failed to show a significant relationship between inflation, human capital and foreign aid and economic growth in the long run. Based on the results, it can be concluded that in the short run, policy variables contributed to economic growth more than factor accumulation (physical and human capital), while in the long run, a mixture of factor accumulation and policy variables was the major driver of economic growth.

Using the growth accounting framework, the study revealed that total factor productivity (TFP) growth was the most important individual factor in explaining economic growth in Uganda, followed by capital stock and labour. The results showed that TFP trends mostly followed those of GDP growth. The relative contribution of labour remained low despite improvements in the educational attainment of the labour force in Uganda. On the other hand, the contribution of capital to GDP was mostly stable throughout the study period. These results have significant policy implications. It is recommended that the government of Uganda should focus on policies that enhance both the quantity and quality of human and physical capital as well as total factor productivity, create incentives that enhance investment, control inflation, improve government effectiveness, encourage international trade, and ensure the effectiveness of foreign aid.