An Evaluation of the Impact of Reforms in Services on Downstream Manufacturing: Evidence and Policy Implications for Uganda's Non-Financial Services

Significant reforms of the services sector have been conducted in Uganda since 1987, motivated, in part, by the common notion that efficiency in the provision of services can deliver productivity growth in all sectors of the economy, which in turn stimulates overall economic growth and development. Given that the demand for services is often highly income elastic, as incomes grow, the demand for services also tends to expand accordingly. In another respect, services are widely used as intermediate inputs in various production activities, while the proportion of labor utilization in services production has tended to grow larger than that of capital. This paper applies a cross sectional panel estimation approach to discern the effects of services liberalization on downstream manufacturing productivity in Uganda. The results show that the average coefficient (average returns to scale of 0.6251 is less than constant while the respective coefficients of capital and labour are 0.1420 and 0.4831, respectively. The relative coefficient on the composite services reform index is positive, suggesting that services liberalization have had a marked positive impact on manufacturing and its productivity. When individual sector reform indices are accounted for in the regression, the results also confirm that when prudent reform measures were undertaken in different services sub sectors, they imparted strong and significant improvements in the productivity of firms across the board.