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Mount Elgon, Uganda, Africa - February 15, 2020: Guides and porters assist tourists climbing Mount Elgon, a tourist attraction for hikers, climbers and bird watchers visiting East Africa.
Africa in Focus

Leveraging IWOSS and soft skills to address slow structural transformation and youth unemployment in Uganda

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In recent years, Uganda’s economic growth has been among sub-Saharan Africa’s strongest, averaging 5.4 percent between 2010 and 2019 (World Bank, 2020). However, the rate of growth has failed to match the rate at which employment opportunities are created to both absorb the burgeoning labor force and improve livelihoods. The high population growth rate (recorded at 3.1 percent per year) has resulted in a high labor-force growth rate that has outpaced the rate of job creation, resulting in increasing unemployment and pervasive underemployment rates.

M

Madina M. Guloba

Senior Research Fellow - Economic Policy Research Centre in Uganda

M

Medard Kakuru

Research Analyst - Economic Policy Research Centre in Uganda

Moreover, in this tough labor market, young and female workers remain disadvantaged, and overall employment numbers often mask other problems in the labor market. For example, as we find in our recent working paper, while the number of unemployed actually declined between 2012/13 and 2016/17 for both young female Ugandans (23.1 percent vs. 18.5 percent) and young male Ugandans (18.5 percent vs. 9.6 percent), the annualized growth rate of discouraged workers—potential workers who would like to work but are unable to secure a job and so have given up on the process—is extremely high and more acute among Uganda’s youth.

A solution?

Like in many other African countries, the slow growth of Uganda’s manufacturing sector—a sector that historically has led to the absorption of low-skilled workers and structural transformation in much of the developing world—has constrained labor outcomes in the country. To address this issue, recent research points to other sectors—termed “industries without smokestacks” (IWOSS)—that share much in common with manufacturing, especially their tradability and tendency to absorb large numbers of low-skilled workers. Examples of IWOSS include agro-industry, horticulture, tourism, business services, transit trade, and some information and communication technology (ICT)-based services. To better assess the potential of these sectors to drive structural transformation, we recently published a case study examining the constraints to growth of select IWOSS sectors (horticulture, agro-processing, and tourism) and skills requirements for those sectors.

IWOSS sectors’ growth contributing to employment growth

IWOSS are well-positioned to help Uganda achieve its growth objectives: Indeed, while the contribution of IWOSS to GDP in recent years has been less than non-IWOSS sectors, it has been higher than manufacturing (Table 1). Moreover, growth in IWOSS sectors (22.9 percent) has been higher than either manufacturing (17.2 percent) or non-IWOSS (18.4), implying that the contribution of IWOSS to GDP is increasing.

In terms of employment, IWOSS sectors show higher elasticities than non-IWOSS and manufacturing: A 1 percentage point increase in GDP in an average IWOSS sector is associated with a 0.96 percent increase in employment. For manufacturing, the employment elasticity is negative and sizable, which could suggest that automation in the sector is replacing workers, having the opposite historic effect of industry. Despite agriculture being the biggest employer, it has a very low employment elasticity.

Table 1. Change in GDP and employment from 2012/13 to 2016/17 by sector

Table 1. Change in GDP and employment from 2012/13 to 2016/17 by sector

Source: Authors own calculations’ using UBOS Statistical Abstracts and Survey data sets.
Note: This is Table 5 in the case study.

What sectors are driving structural transformation?

As seen in Figure 1, which combines GDP/output and employment growth to get a full picture of industry changes over time, by and large, little structural transformation has taken place over the time period under consideration. While growth in IWOSS overall has contributed to employment growth, the subsector “finance, business, and professional services” seems to have significantly driven the structural growth agenda in the country—much like in South Africa. While tourism, horticulture and export crops and agro-processing—the three IWOSS sectors we explore in this paper due to their significant contributions to revenue, potential for absorbing many Ugandan laborers, and strong backward and forward linkages–do provide great contributions to GDP and employment, they also have had mixed impacts on the economy’s structural growth. For example, while agro-processing seems to have spurred transformation, this change seems to have been driven by its contribution to GDP, not necessarily as an employment avenue.

Figure 1. Correlation between sectoral productivity and change in employment in Uganda, 2016/17

Figure 1. Correlation between sectoral productivity and change in employment in Uganda, 2016/17

Notes: Uses methodology in McMillan and Rodrik (2011); yellow indicates IWOSS sectors; purple indicates manufacturing; and light blue indicates other non-IWOSS sectors.
Source: Authors’ own illustration using 2016/17 UNHS dataset.

What does the future hold for growth and employment in IWOSS sectors?

The outlook for the Ugandan economy over the next 10 years suggests its makeup will shift, leading to a concentration of employment in tourism, finance and business services, ICT, and agro-processing. In our recent paper, we use a 7 percent GDP growth scenario (Table 2) to examine the prospects for job creation in the country. We find that IWOSS sectors will expand somewhat faster (8 percent) than non-IWOSS (6 percent) and twice as fast as manufacturing (4 percent) by 2029/30. In the same vein, employment is expected to grow at about 4.5 percent, largely driven by employment growth in the IWOSS sectors (6.3 percent).

Table 2. Sectoral distribution of GDP and employment in 2029/30—an illustrative 7%-growth scenario

Table 2. Sectoral distribution of GDP and employment in 2029/30—an illustrative 7%-growth scenario

Source: Extracted from Table 20  in the case study.

But are young people ready for these jobs?

While in other countries, IWOSS looks to readily absorb low-skilled workers, our research finds the trend in Uganda to be more nuanced. In fact, in line with the projected strong growth in IWOSS sectors, we find that the skill profile of workers in IWOSS will shift distinctively toward skilled and high-skilled workers, which could be problematic since we predict that, by 2029/30, 54 percent of Ugandan workers in IWOSS will need to be skilled or high-skilled. For a detailed discussion at the sector-specific level, see Table 21 in the full case study).

Figure 2. Uganda’s 7%-growth scenario—Projected employment by skill level

Figure 2. Uganda’s 7%-growth scenario—Projected employment by skill level

Note: MFG = manufacturing; non-IWOSS excludes manufacturing.
Source: Derived from Table 21 in the Uganda case study.

Requisite skills needed for new jobs in horticulture, agro-processing, and tourism

 To better advise Uganda on how it can prepare its young people to enter a labor market in which IWOSS are expanding, we need to assess which skills are both available in and needed for the market. To do so, we conducted firm surveys and found, among other trends, that gaps in problem-solving skills among employees inhibit firms from meeting their full potential. More specifically we found that tourism firms place a heavy emphasis on problem-solving and basic skills; horticulture, on problem-solving and social skills; and agro-processing on basic skills, At the same time, the surveys revealed that while the youth were overskilled for the jobs they were holding, the majority had skills gaps in problem-solving in all three IWOSS sectors of focus. Figure 3 illustrates this trend for the tourism sector (see details in full case study).

Figure 3. Skills gap by occupation type in the tourism sector—hotels

Figure 3. Skills gap by occupation type in the tourism sector—hotels

Source: Authors’ own calculations based on field survey data (2020).

Importantly, beyond these needs, we also find that digital skills will be paramount for future occupations likely to hire the youth. Indeed, future digital-skills needs were identified as a must by the interviewed firms in the tourism sector. In horticulture, digital skills will be needed for the use of computerized mechanisms in the production of fresh fruits and vegetables while in agro-processing, as automation progresses, digital skills will be needed for the production of primary raw materials.

Constraints to aspired growth

In addition, as our paper points out, to leverage IWOSS sectors and soft skills as avenues for addressing Uganda’s current slow structural transformation and youth unemployment challenges, several constraints to the growth of these sectors must be addressed. Outstanding among these obstacles are: limited access to finance; poor and costly infrastructure (roads, electricity, water, internet, and phone coverage); inherent nontariff barriers; government bureaucracy; and skill gaps (noted briefly above).

Unfortunately, the emergence of COVID-19 has only exacerbated challenges facing IWOSS sectors and the economy in general (see our paper updating our original case study as Uganda now faces the COVID-19 pandemic). Indeed, the three IWOSS subsectors on which we focused experienced significant losses due to reduction of earnings as business operations declined owing to the pandemic-induced lockdown across both the country and the globe. Indeed, many firms responded by laying off some workers, both temporarily and permanently.

Recommendations

In the original case study, we offered a number of high-level policy recommendations that, despite the COVID-19 pandemic, remain extremely relevant for Uganda’s growth and job-creation potential. If anything, the pandemic has made our recommendations all the more urgent. These include, among others:

  • Develop avenues to improve the soft and digital skills of workers and reduce the cost of trading through investing in physical and digital infrastructure. Such a push could eradicate the skills mismatch reported by employers as one of the obstacles to their operations. We continue to see the importance of this recommendation now: When facing COVID-19, sectors and firms that adopted ICT/digital technologies continued to survive within the measures that the government took to control the spread of COVID-19.
  • Ensure increased access to affordable financing. Already, a step has been taken in this direction by recapitalizing the Uganda Development Bank (UDB), the Uganda Development Corporation (UDC), and the Micro Finance Support Centre (MFSC) in order to offer affordable credit and facilitate the COVID-19 economic recovery. Such a program is an opportunity for agro-processing firms to acquire long-awaited financing, which historically has been one of their most difficult operating constraints.

For a deeper dive into our research as well as sector-specific recommendations, see our working paper, “Industries without smokestacks in Africa: A Uganda case study.”

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