Analysis of the Drivers of Service Sector Growth in Uganda

Abstract

The service sector in Uganda emerged prematurely as the leading driver of economic growth. This was before the country fully industrialised as described under the dual economic development model. Despite the enormous contribution of the service sector to economic growth in Uganda, an empirical analysis of its drivers is still in shortage. The main objective of this study is to examine the drivers of rapid growth in Uganda’s service sector using an Autoregressive Distributed Lag (ARDL) model and a long annual time series spanning the period 1980-2020. The results of this study showed that the past level of service performance determines how the sector performs at present. Also, the Human Capital Index (HCI), Foreign Direct Investment (FDI) and Gross National Expenditure (GNE) significantly improve service sector growth in both the short run and long run. Also, if the service sector experiences a shock, the sector will adjust to its long-run equilibrium at an adjustment speed of 24.2%. The findings of this study, therefore, highlight the need for government to increase funding for human capital development through investing in the education and healthcare sectors. Further, the government should implement favourable trade policies aimed at attracting more FDI. Foreign investors should be provided free land and tax holidays. Given the important role that the service sector plays in Uganda’s economy, a large share of GNE should be directed to the service sector to stimulate its performance.