Uganda - Country assistance strategy

20886 MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA December 18, 2000 Country Department for Uganda AFC04 Africa Region  GOVERNMENT FISCAL YEAR: July 1- June 30 Currency Equivalents Currency Unit = Uganda Shilling ( U Sh) US$1= U Sh 1,820 (September 2000) ACRONYMS AND ABBREVIATIONS ACP Aids Control Program LGDP Local Government Development Program BFP Budget Framework Paper MIGA Multilateral Investment Guarantee Agency BOU Bank of Uganda MTEF Medium Term Expenditure Framework CAE Country Assistance Evaluation NGO Non-Governmental Organization CAS Country Assistance Strategy NPV Net Present Value CD Country Director NRM National Resistance Movement CDF Comprehensive Development Framework NURP Northern Uganda Reconstruction Project CG Consultative Group NURP Northern Uganda Reconstruction Project CPAR Country Procurement Assessment Report OED Operations Evaluations Department DflD Department for International Development (UK) PAF Poverty Action Fund DO Development Objective PEAP Poverty Eradication Action Plan DP Democratic Party PER Public Expenditure Review DRC Democratic Republic of Congo PMA Plan for the Modernization of Agriculture EAC East Africa Community PRGF Poverty Reduction and Growth Facility ESAC Education Sector Adjustment Credit PRSC Poverty Reduction Support Credit EU European Union PRSP Poverty Reduction Strategy Paper FIAS Foreign Investment Advisory Service PSD Private Sector Development FSAP Financial Sector Assessment Program QAG Quality Assurance Group GDLN Global Development Learning Network SME Small and Medium Enterprises HIPC Heavily Indebted Poor Country UAC Uganda's AIDS Commission HIV/AIDS Human Immunodeficiency Vims/ UCB Uganda Commercial Bank Acquired Immune Deficiency Syndrome UIA Uganda Investment Authority HSSP Health Sector Strategic Plan UPC Uganda People's Congress ICRG International Country Risk Guide UPE Universal Primary Education ICT Information and Communication Technology UPPAP Uganda Participatory Poverty Assessment IDA International Development Association Project IFC International Finance Corporation USAID U.S. Agency for International Development IPH Institute of Public Health WBI World Bank Institute IMF International Monetary Fund WorLD World Links for Development IDA IFC Vice Presidents: Callisto E. Madavo Assaad Jabre Country Directors: James W. Adams Haydee Celaya Sector Managers: Fred Kilby Abdelkar Allaoua Task Managers: Gedion B. Nkojo, Satu Kahkonen James Emery  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA CONTENTS EXECUTIVE SUMMARY ....................................................; 1. ECONOMIC, SOCIAL AND POLITICAL DEVELOPMENT ....................................................1 A. ECONOMIC PERFORMANCE .1 B. PRIVATE SECTOR DEVELOPMENT FOR ECONOMIC GRoWTH .3. C. POVERTY REDUCTiON .5... D. PROGRESS IN SOCIAL AND HUMAN DEVELOPMENT .7. E. POLITICAL CONTEXT ..8... 2. THE GOVERNMENT'S STRATEGY ................................ 9 A. THE POVERTY ERADICATION ACTION PLAN AND POVERTY REDUCTION STRATEGY PAPER ...9 (i) Directly increasing the ability of the poor to raise their incomes .10 (ii) Directly increasing the quality of life of the poor. D (iii) Creating an enabling environmentfor economic growth and structural transformation 11 (iv) Ensuring good governance and security .11 B. PEAP/PRSP IMPLEMENTATION, MEDIUMTERM EXPENDITURE FRAMEWORK AND COMPREHENSIVE DEVELOPMENT FRAMEWORK ............................................................ 12. 3. THE WORLD BANK GROUP'S COUNTRY ASSISTANCE STRATEGY ................................ 13 A. OBJECTIVE OF THE 2000 CAS .13. B. LESSONS LEARNED FROM PAST BANK GROUP ACTIVITIES .14 C. STRATEGIC ELEMENTS OF THE CAS .15. D. SELECTIVITY IN BANK GROUP'S PROGRAM .16 E. ASSISTANCE PROGRAM ...................................................... 17. (i) Directly increasing the ability of the poor to raise their incomes ...18 (ii) Directly increasing the quality of life of the poor. 20 (iii) Creating an enabling environment for economic growth and structural transformation 21 (iv) Ensuring goodgovernance and security .................................... 23 F. MANAGING THE EXISTING PORTFOLIO .25 G. DONOR COORDINATION AND COLLABORATION .25 H. BANK GROUP DECENTRALIZATION .26 I. RESOURCE REQUIREMENT .27. J. CAS CONSULTATIONS .............. 27.. 4. MACROECONOMIC PROSPECTS FOR CONTINUED POVERTY REDUCTION . 27 A. MACROECONOMIC SCENARIOS .2. B. EXTERNAL ENVIRONMENT .................30.................................... 3Q C. TRIGGERS .3.Q.. D. BENCHMARK INDICATORS ..................31.... ..... ......................................... 31. E. MONITORING AND EVALUATION .32. F. CONSTRAINTS AND RISKS. 32. 5. CONCLUDING REMARKS. 34.  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA CONTENTS (cont'd) FIGURES Figure 1: GDP and GDP per Capita Real Growth Rates Figure 2: Annual Inflation Figure 3: Corruption Index Figure 4: Quality of Bureaucracy and Law and Order Indexes TEXT BOXES Box 1: The Participatory Poverty Assessment Project and the Nature of Poverty in Uganda Box 2: Government's Policy and the Fight against HIV/AIDS Epidemic Box 3: Government's Strategy and Priorities in Private Sector Development Box 4: Comprehensive Development Framework (CDF) in Uganda Box 5: Examples of Uganda's Participatory Processes Box 6: Comments on the Draft CAS by Some Key Stakeholders in Uganda Box 7: Triggers for the Low Case Scenario TEXT TABLES Table 1: Macroeconomic Performance Table 2: Components of the Bank Group's Assistance Program for Uganda, FY2001 - 2003 Table 3: Uganda's Partnership Matrix, Current Situation Table 4: Macroeconomic Projections ANNEXES Annex 1: Overview of Planning Annex 2: Progress with Sector Plans for Implementing the PEAP Annex 3: Results of the Client Survey and OED Review Annex 4: Portfolio Overview Annex 5: Standard Annexes Map: Uganda - IBRD 25052R1  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA EXECUTIVE SUMMARY 1. Over a decade ago, PresidentMuseveni's Government inherited a country in economic and social shambles, with practically all economic and social indicators portraying an abysmal picture. Given this background, Uganda's economic performance over the last decade has been impressive. The average real rate of GDP growth has been about 6.9 percent per annum, resulting in an annual 3.7 percent increase in real GDP per capita. Consumer price inflation has fallen from 24.6 percent in 1990/91 to -0.2 percent in 1998/99. The Government's reform program has had considerable success in establishing fiscal discipline, restructuring public expenditure, opening up the economy and anchoring its reliance on market forces. Also, there has been a significant reduction in the country's debt overhang, as a result of the Heavily Indebted Poor Countries (HIPC) initiative. Uganda was the first country to reach a completion point and to access the original HIPC initiative in April 1998 and the enhanced HIPC initiative in May 2000, respectively. More significantly, there is clear evidence that the country's high economic growth and poverty reduction efforts have yielded positive results. According to the Government's household surveys, there has been a clear and impressive decline in poverty (headcount index) of more than 20 percent over the five years since 1992. 2. This impressive progress notwithstanding, with 44 percent of the population remaining below the poverty line, poverty remains a major issue; its eradication is the number one priority on the country's development agenda. Maintaining growth at levels sufficient to reduce poverty will require addressing the remaining constraints to growth, especially, impediments to private sector development. Moreover, despite the substantial increase in the government's resources allocated for social services, there has been less than commensurate progress in social and human development. Though most key education and health indicators have improved in the past decade, almost all the social indicators are still worse than average in Sub-Saharan Africa. The main challenge in the education sector is quality. In health, the major issues are limited availability and poor quality of health services, adult mortality and life expectancy which are adversely affected by the HIV/AIDS epidemic. However, Uganda is one of the first countries in Africa where the incidence of HIWV/AIDS is declining as a result of the country's aggressive response to the epidemic. 3. The previous country assistance strategy (CAS) was considered by the Board in April 1997. It focused on poverty reduction through accelerated growth, and emphasized continued macroeconomic stability and increased analytic work to facilitate policy formulation and determine investment priorities. This CAS for FY01 -03 seeks to build on the previous CAS by reinforcing its focus on poverty reduction through sustained growth. The CAS was developed in consultation with the Government, private sector, civil society and other donors. Its over-arching objective is to support Uganda's economic transformation and poverty reduction strategy spelled out in the Governrnrnt's Poverty Eradication Action Plan (PEAP)/Poverty Reduction Strategy Paper (PRSP). While the work to maintain macroeconomic stability will continue, in the period ahead emphasis in assistance will shift to the sector level and cross-cutting public sector management issues. Effectively addressing these issues and facilitating economic transformation i  calls for broadening of the decision-making process to involve all key stakeholders, particularly the sector ministries and civil society. Secondly, it calls for a change in the Bank's lending modalities. This would entail moving away from the traditional combination of adjustment operations with discrete investment projects, to supporting a comprehensive reform program through the government's budget, via a series of Poverty Reduction Support Credits (PRSCs). In addition to PRSCs, the Bank would continue supporting some self-standing projects for capacity building and infrastructure investments directly targeted to poverty alleviation and private sector development. IFC expects to increase substantially its support for Uganda's private sector development agenda through increased investments focusing on infrastructure, SMEs, and agriculture/agribusiness advisory assistance and capacity building. 4. Only two economic scenarios are considered in the Bank Group's strategy over the next three years: the high case and low case. Based on Uganda's track record, the Bank and Government consider the assumption of Uganda continuing in the high case scenario realistic. This scenario is consistent with the Government's program supported by the IMF's Poverty Reduction and Growth Facility (PRGF). Moreover, if the Government is to achieve its poverty reduction objective, it has to continue operating in this scenario. Under this scenario, GDP is projected to grow up to seven percent per annum with annual inflation rates of about five percent. International reserves would be maintained at a level equivalent to about five months of imports of goods and services. Under the scenario, IDA commitments during the three-year CAS period would total about US$ 1. I billion. 5. Falling to the low case could result from a deteriorated intemal security situation and/or the country being drawn deeper into regional conflicts, leading to diversion of public funds for defense purposes and decline in growth. It could also occur if government pursued adverse economic policies, pushing the macroeconomic program off track. Under this scenario, GDP would grow between 3-4 percent with an annual inflation of between 6-15 percent. Foreign reserves would be drawn down to 2.5 to 4.0 months of imports. IDA lending program would be reduced to a total commitment of US$300 million over the CAS period. The probability for this case is low. 6. There are several risks which threaten Uganda's ability to achieve its set goals. The country is vulnerable to exogenous shocks, especially droughts, plant diseases and commodity price changes which could affect rural incomes and export earnings. However, Uganda is progressively diversifying its export base. In addition, the projected level of international reserves together with the HJPC debt relief increase the country's abilities to absorb the shocks. Other risks include institutional capacity weaknesses, corruption, HIV/AIDS and political transition. In practically all these areas, actions are under way and/or planned to mitigate the risks. For the Bank, the highest risk is a possible overestimation of the Government's capacity to implement the PEAP/PRSP. However, the Bank's three-year work program is designed to help overcome these constraints and minimize the risk. Finally, a deterioration in the security situation is possible with attendant pressures to increase military expenditures. 7. The following issues were suggested for Board discussion: * Does the Board consider that the Bank Group's proposed assistance Strategy adequately addresses the development challenges facing Uganda? * Does the Board consider the Bank Group's proposed instruments, including a shift to providing support through PRSCs, appropriate? ii  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA 1. ECONOMIC, SOCIAL AND POLITICAL DEVELOPMENT 1. Over the period 1971-85 both the Ugandan economy and society collapsed. By 1986, when the National Resistance Movement (NRM) captured Kampala and formed a government, Uganda had suffered the mismanagement of previous governments, including civil wars, mass emigration of the skilled, and mass murder. The performance of the Ugandan economy needs to be reviewed against this background, keeping in mind that Uganda has been and still is recovering from an extended period of instability and disastrous economic policies. A. ECONOMIC PERFORMANCE 2. Given the above context, Uganda's economic performance has been impressive. The average real rate of GDP growth has been about 6.9 percent per annum since 1990/91, resulting in an annual 3.7 percent increase in real GDP per capita (see Figure 1) and over a 20 percent decline in poverty (headcount index) from 1992 to 1997. The annual average consumer price inflation has fallen from 24.6 percent in 1990/91 to -0.2 percent in 1998/99 (see Figure 2). The reform program implemented since President Museveni came to power in 1986 has aimed at establishing fiscal discipline, opening up the economy and promoting reliance on market forces. It has been successful in establishing fiscal discipline and restructuring public expenditure. Progress has been Figure 1: GDP and GDP per Capita Figure 2: Annual Inflation Real Growth Rates (%) (9') 60 12 402 6 20 91 92 93 94 95 96 97 98 99 91 92 93 94 95 96 97 98 99 Fiscal Year Fiscal Year -GDP a PercapitaGDP GDP deflator ...... Change in CPI Source: Uganda Bureau of Statistics Source: Uganda Bureau of Statistics made on trade liberalization, privatization, civil service and financial sector reforms and an impressive decentralization effort is ongoing. Further, the high stock of debt that constrained economic development in Uganda has become a smaller obstacle as a result of Uganda's participation in the Heavily Indebted Poor Country (HIPC) initiative. By end-June 1997, Uganda's net present value (NPV) of debt-to-exports ratio was 243 percent. As debt sustainability analysis concluded that this was unsustainable, the IMF and World Bank agreed in 1997 to support a debt reduction package under the HIPC. Uganda was the first country to reach the completion point in April 1998. After the Interim and Development Committees endorsed enhanced relief to I  Table 1: Macroeconomic Performance Indicator 1990/91 1991/92 1992193 1993/94 1994/95 1995Y96 1996/97 1997/98 1998t99 Annual average inflation (%) 24.6 42.4 30.0 6.5 6.1 7.5 7.8 5.8 -0.2 National accounts, % growth rates Agriculture 2.9 -1.0 9.3 1.8 5.9 4.3 1.1 1.9 6.9 Industry 8.2 8.4 8.4 13.0 20.3 16.6 11.4 11.5 9.1 GDP at market prices 5.6 3.4 8.3 6.4 11.5 9.1 4.7 5.6 7.4 Real per capita GDP growth (%) 2.6 0.5 4.4 3.1 8.2 6.0 1.8 2.6 4.4 National accounts, % of GDP at market prices Gross domestic investment 15.2 15.9 15.2 14.7 16.4 16.1 16.1 15.0 16.4 Public investment 7.4 7.4 6.7 5.4 5.4 5.3 4.7 4.6 4.7 Private investment (incl stock changes) 7.8 8.5 8.5 9.2 11.0 10.7 11.4 10.4 11.7 Gross domestic savings 0.7 0.4 1.1 4.3 7.4 4.6 g.0 5.6 4.9 External indicators Debt service/exports GNFS (/o - before HIPC/resch) 95.9 127.7 73.8 53.9 25.8 23.1 20.3 27.2 24.6 Debt service/exports GNFS (% -after HIPC/resch) 95.9 127.7 62.9 49.0 23.5 21.8 17.9 26.4 18.4 Terms of trade index, 1990/91 = 100 100.0 75.1 68.2 90.5 155.8 110.2 97.3 109.2 103.8 Gross reserves, months of imports GNFS 0.9 1.5 1.9 3.1 3.4 3.6 4.5 4.8 4.9 Public expenditure on priority sectors, % of GDP at masket prices Education 2.18 1.94 2.61 2.68 3.15 Health 0.88 1.02 0.86 0.69 0.78 Roads 0.48 0.45 0.81 0.41 0.72 Agriculture 0.28 0.15 0.16 0.12 0.11 Water and environment 0.11 0.04 0.04 0.04 0.19 Total expenditure on priority sectors 3.94 3.60 4.49 3.94 4.95 Total expendltures on priority sectors, % of total domestic non-interest expenditures 38.8 38.7 41.3 42.2 45.5 Source: Governnent of Uganda, IMF and staff estimates. HIPCs in 1999, Uganda was again the first to begin receiving additional assistance'2 The estimated NPV of debt-to-exports ratio is currently about 150 percent. Key macroeconomic indicators for 1990-99 are presented in Table 1. 3. Uganda was also the first country to present a full Poverty Reduction Strategy Paper (PRSP) to the Boards of the Bank and IMF in May 2000.2 A summary of the Government's Poverty Eradication Action Plan (PEAP), a home-grown medium-term development plan, was used for this purpose since the objectives and content of the PRSP and PEAP are consistent. 4. The sustainability of high economic growth in Uganda is, however, an issue. First, the economy is heavily dependent on agriculture (currently accounting for about 44 percent of GDP and employing about 80 percent of the labor force) which leaves Uganda vulnerable to droughts and plant diseases. Second, the economy is subject to comnmodity price fluctuations since agricultural products account for nearly 100 percent of the country's merchandise exports. In 12 Total relief provided to Uganda under the original HIPC framework was about US$650 million (or US$347 million in NPV terms). The completion point under the enhanced framework was reached in May 2000, and it is expected that assistance under the enhanced initiative will be about US$1.3 billion (or US$656 million in NPV terms), or total relief of almost US$2 billion from the two operations. 2 The Board considered Uganda's PRSP (Report No. IDA/SecM2000-145 dated April 3, 2000) on May 2, 2000. 2  particular, changes in coffee prices are a cause of concem because over half of Uganda's export revenues come from coffee and Uganda's high economic growth rates in the past decade were partially driven by high international coffee prices.3 Third, the potential for growth from macroeconomic reforms has now been largely exploited, and therefore further economic growth requires a broader reform agenda. Specifically, there are sectoral and difficult governance issues which need to be effectively addressed. 5. An overarching consideration is that development and growth must occur in an environmentally sustainable manner, given that 90 percent of Uganda's population is directly dependent on the country's natural resource base. Due to lack of awareness of the longer term implications of current resource use for sustainable economic growth and poverty alleviation, economic expansion poses a threat to the integrity of Uganda's rich and diverse natural resource base. The key environmental concerns are deforestation, soil erosion, loss of wildlife and habitat, and the degradation and loss of prime agricultural land and wetlands through poor land management practices. The Government has in place a legislative framework and regulatory system to facilitate environmentally sound development and to govern the use of natural resources. However, institutional weaknesses and governance problems have so far undernined their enforcement. B. PRIVATE SECTOR DEVELOPMENT FOR EcoNoMIc GROWTH 6. To ensure continued high economic growth and to mitigate vulnerability to exogenous shocks, an economic transformation is needed in Uganda. Specificaly, as underlined in the PRSP, the modernization of agriculture and diversification into non-farm private sector activities are critical. There has been progress: the Govermment is pursuing a comprehensive privatization program and has already successfully liberalized marketing of Uganda's coffee. Uganda has been lowering tariff and non-tariff barriers to regional trade, removed all restrictions on intemational capital transactions, and about two-thirds of Uganda's public enterprises have been privatized in the past decade. A recent noteworthy success was the privatization of the telecommunications utility in the spring of 2000 and the accompanying sector reform which have brought in a second national operator and a second cellular licensee, expanding service options and lowering prices. In addition, reforms of the power utility, airline, railways, water, and other public enterprises are ongoing. Overall, private investment as a share of GDP has increased from 7.8 percent in 1990/91 to 11.7 percent in 1998/99. 7. Inefficiencies in public service delivery and markets are hindering both growth and diversification to non-farm activities. According to 1998 surveys of domestic and foreign investors, there are four key impediments to the development of Uganda's private sector: (i) inadequate and poor infrastructure; (ii) an underdeveloped financial sector; (iii) high levels of corruption; and (iv) restrictive regulations, red tape and a lack of business services. In addition, the availability of skilled labor is constraining development. The Bank Group has supported government efforts to address critical constraints in these areas through Bank projects, IFC advisory and technical assistance on privatization and regulatory reform in key sectors, and FIAS work on the investment environment. However, given the complexity of these issues, progress has been slow and further work on each area is needed. 8. Infrastructure. Inadequate and unreliable electricity is ranked as the most binding infrastructure constraint to growth by most domestic and foreign firms. Frequent load shedding, 3 However, the role of coffee in the country's export earnings has decreased from 72 percent in 1990/91 to 56 percent in 1998/99, as non-traditional agricultural exports (fish, horticultural and other agricultural products) have grown from US$49 million in 1990/91 to US$242 million in 1998/99. 3  power failures and voltage fluctuations complicate production and force firms to invest in private generators and voltage stabilizers. In addition to power, surveys indicate that the state of the transport network, including roads and railways, poses a considerable burden on business activities in Uganda. 9. Financial sector: The performance of the financial sector has improved, but access to financial services remains a problem. In 1993, the Government launched a financial sector reform program. Under this program, weak banks were restructured, insolvent banks closed, and banking supervision strengthened at the Bank of Uganda (BOU). The new Financial Institutions Statute increased the capital requirements for all banks, and included provisions for prompt corrective action by BOU for noncompliance. The reform did suffer a setback, however, when the privatization of the Uganda Commercial Bank (UCB) was reversed owing to breach of contract and other questionable practices on the part of the investor. Since then, UCB has been operating under BOU appointed management; the Government is considering options for its re-privatization. Given UCB's dominance in the financial sector, privatization and improved management of this Bank is key to overall financial sector performance. As a result of reforms carried out and more aggressive banking supervision by BOU, the ratio of non-performing assets to total assets has fallen. However, the ratio of credit to GDP is still low: 5.6 percent of GDP, while the average for Sub-Saharan Africa is 14 percent. 10. Corruption: Corruption in Uganda is Figure 3: Corruption Index systemic and negatively affects private sector Range. 1-6, 6=iess corrupt development by raising the cost of doing business and thereby, growth. A recent survey of Ugandan firms indicates that the majority of firms pay significant bribes. A survey of households 6 reveals that bribery is most common in the police 4 and judiciary, with two-thirds of users paying a 3 bribe to the workers in the judiciary services. , Further, the corruption indicator of the 097 International Country Risk Guide (ICRG) __ ._9_3_9_____7_ 9_9 suggests that perceived corruption has worsened Source: Irternational Country Risk Guide in Uganda in the past five years (see Figure 3).4 11. Legal and regulatory environment: Survey Figure 4: Quality of Bureaucracy and data for foreign investors in Uganda show that Law and Order Indexes weak governance, including ineffective enforce- Range: 1-6, 6=better bureaucracy, ment of laws and contracts and excessive red tape, law and order also seriously limits private sector growth. 6 Ineffective law enforcement and outdated laws, , regulations and practices in many areas create 4- unproductive administrative burdens on the private 3 sector, in addition to multiplying opportunities for 2 -- _ llt tt IIL corruption. There are some signs of improvement I in these areas. Efforts to reduce "red tape" have 0 91 93 95 97 99 been partially successful, but further reforms are I .Lw ..d . - D ..i,iy still required. Indexes of the ICRG, presented in Figure 4, suggest that the quality of bureaucracy Source: International Country Risk Guide 4The ternational Country Risk Guide reflects the perceptions of banks, multinational companies and other institutional investors. The corruption index ranges from 1 to 6, the higher scores indicating less corruption. 4  especially the rule of law, has been steadily improving in the past nine years.' 12. Labor markets and standards: Firms also consider lack of skilled labor to be a constraint to their activities in Uganda. Moreover, the health status of the work force is a concern for investors: absences from work due to prolonged illnesses (such as HIV/AIDS and malaria) or mourning are common and have a negative effect on firm operations. Uganda has labor laws and regulations, but their enforcement has been weak and inconsistent due to capacity constraints at different levels of Government. The Constitution of Uganda provides for the right of every person to join workers' associations or trade unions, and the law allows unionization if the majority of the work force supports it. Further, the law prohibits forced or bonded labor, but the lack of resources has prevented the Government from enforcing this prohibition effectively. Also, the law prohibits employers from hiring workers below the age of 18. However, due to weak enforcement, child labor is common. Most working children are employed in the informal sector, often on the subsistence farms of extended family members or as domestic servants. Uganda is a signatory to the United Nations Convention on the Elimination of All Forms of Discrimination against Women and to the Vocational Rehabilitation Employment (Disabled Persons) Convention of 1983, though it has not ratified yet the relevant ILO Conventions. Finally, minimum wage legislation exists, but the minimum wage rate has not been adjusted since the 1960s. C. POVERTY REDUCTION 13. High economic growth in the 1990s has translated into substantial increases in the living standards of Uganda's poor. Since 1992, the Government has been monitoring living standards through annual household surveys.6 The Bank and Government have cooperated in analyzing the results of these surveys and, as noted in the PRSP, this analysis confirms that there has been a clear and impressive decline in poverty (headcount index) of over 20 percent over the five-year period from 1992.7 Average real household income has risen by 17 percent over the period and expenditures of the bottom 10 percent have risen even more (by 29 percent). The income group which has benefited most is cash crop farmers: the incidence of poverty in this group fell from 60 percent to 44 percent between 1992 and 1997. The reduction in poverty can be traced to two factors. First, liberalization of coffee has had a fundamental impact on small-holder coffee farmers who have directly benefited from the removal of market controls and the emergence of a dynamic group of private traders. Second, the international coffee prices soared in the mid-1990s and remained high for several years. The resulting increase in the returns to coffee farmers has led to a significant number of small-holder producers moving out of poverty. 14. In spite of this progress, poverty remains a major issue in Uganda. About 44 percent of the population still lives below the poverty line, and the average per capita income in Uganda is only now approaching the level achieved in 1970. The significant regional disparities in poverty are of concern: in the central region, the incidence of poverty is 20 percent compared to 59 percent in the northern region. Further, as pointed out in the PRSP, poverty among the largest group of the poor in Uganda - subsistence food crop producers' - declined only marginally during the five year period: from 64 percent in 1992 to 62 percent in 1997. The indexes reflect the perceptions of banks, multinational companies and other institutional investors. The quality of bureaucracy and rule of law indexes range between one and six, the higher number hidicating better quality bureaucracy and sounder legal institutions. 6 As an exception, in 1998, the survey was not conducted due to lack of funds. 7 The poverty lines were calculated as expenditures required in order to obtain specified amounts of calories (depending on sex and age) and to meet minimum non-food requirements. 8 In 1996, subsistence food crop producers represented 44 percent of the total population and 57 percent of the poor population. 5  I Box 1: The Participatory Poverty Assessment Project and the Nature of Poverh in Ulganda Povear anaisis in Uganda is breakinrg nevr grcwund Traditionall%. poterty indcitstrs uf incomne. consumption. educauon leveIs, and health srtatu are derited solels from household surtess In LTganda. the Government is de%eloping a broader set of cators to define povne. %hbi,h inhIude risk. vulnerabdlit ph%ical and social isolation. powerlessness, and tnsecur-t These net mindicators hate emerged from dtrel consultation tmh the poor. undertaken b% the Gosernment in the Uganda Poterty Ptrcipaltoy Assessment Project OUPPAPi Thiu assessmenl made it clear to polivtnakers that the poor have the capaci to snaisze poXert-; and appraise tlovernmeit polics to a greater c%'eni than hid been previousiN acknowledged In addilion LIPPAP enabled poor people 1t wi,e their realities and tspre-s the'ir pnonties. which otlen differed from those assumned bh polm makers Priortites, as espressed by poor consmmnities. include. * Improuing securnn * Improving access to clearn water * Elimmiting corruplion. %%hi,h undermines et'lectve servi.e dehiern * Ch ercoming lack of access to, and inlormation on markeb * * Improving inadequate road and transport sstse