OVERVIEW Future Drivers of Growth in RWANDA Innovation, Integration, Agglomeration, and Competition Government of Rwanda Overview Future Drivers of Growth in Rwanda Innovation, Integration, Agglomeration, and Competition This booklet contains the overview, as well as a list of contents and other front matter, from Future Drivers of Growth in Rwanda: Innovation, Integration, Agglomeration, and Competition, doi: 10.1596/978-1-4648-1280-4. A PDF of the final, full-length book, once published, will be available at https://openknowledge.worldbank.org/ and reproduction, print copies can be ordered at http://Amazon.com. Please use the final version of the book for citation, ­ and adaptation purposes. © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. 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Overview Contents Full Contents of Future Drivers of Growth in Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxi Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A Strong Start despite Initial Conditions and Emerging Concerns . . . . . . . . . . . . . . . . . . . . . 2 Future Aspirations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Opportunities and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Main Elements of Rwanda’s Growth Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Six Reform Areas of Importance for Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 FUTURE DRIVERS OF GROWTH IN RWANDA iii Full Contents of Future Drivers of Growth in Rwanda Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxi Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A Strong Start despite Initial Conditions and Emerging Concerns . . . . . . . . . . . . . . . . . . . . . 2 Future Aspirations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Opportunities and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Main Elements of Rwanda’s Growth Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Six Reform Areas of Importance for Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1  Human Capital and Innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Why Is Human Capital Important for Growth?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 A Framework for Thinking about Human Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Stunting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Fertility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Basic Education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Skills Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Tertiary Education and Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 2 Transformation through Trade: Using Exports and Regional Integration to Drive Future Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Setting the Stage: Policy, Performance, and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 FUTURE DRIVERS OF GROWTH IN RWANDA v vi FUTURE DRIVERS OF GROWTH IN RWANDA Envisioning the Future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Priority 1: Harness the EAC as a Platform for Transformation . . . . . . . . . . . . . . . . . . . . . 107 Priority 2: Improve Trade Connectivity by Lowering Transport Costs within the Region and with the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Priority 3: Increase Service Sector Productivity, Both as a Critical Input to Other Priority Sectors and as a Source of Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Priority 4: Stimulate Foreign and Domestic Investment into Tradable Sectors by Using Selective and Performance-Driven Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Priority 5: Accelerate Industrialization through Diversification, Value Addition, and Quality Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 3  Faster Urbanization, Greater Agglomeration. . . . . . . . . . . . . . . . . . . . . . . 135 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 The Promise of Urbanization and Agglomeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Constraints to Successful Urbanization in Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Priorities for Faster Urbanization, Greater Agglomeration. . . . . . . . . . . . . . . . . . . . . . . . . 151 Annex 3A  The Rwanda Spatial CGE Model and Scenarios . . . . . . . . . . . . . . . . . . . . . . 167 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 4 Competitiveness and Enterprise Development for Innovation-Led Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Current State of Rwanda’s Enterprise Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Constraints Faced by Rwanda’s Enterprise Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Reform Agenda for Reaching Upper-Middle-Income Levels. . . . . . . . . . . . . . . . . . . . . . . . 188 Annex 4A  Measuring Resource Misallocation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 5  Transitioning Agriculture and Food as an Engine of Growth. . . . . . . . . 217 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Policy Support for Strong Growth in Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 Emerging Policy Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 Targeting Larger Markets for Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Securing the Natural Resource Base for Innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Policies to Achieve Rapid and Sustainable Growth in Agriculture . . . . . . . . . . . . . . . . . . . 236 Annex 5A  A Graphic Presentation of the TFP Story in Rwandan Agriculture. . . . . . . . . 242 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 6  Capable and Accountable State Institutions . . . . . . . . . . . . . . . . . . . . . . . 251 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 Rwanda’s Record in Governance and Government Effectiveness . . . . . . . . . . . . . . . . . . . . 253 Remaining Governance Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 FULL CONTENTS OF FUTURE DRIVERS OF GROWTH IN RWANDA vii An Agenda for Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 Annex 6A  Rwanda’s Territorial Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 Annex 6B  Investment as a Share of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Annex 6C  Overview of the Public Investment Management Assessment Questionnaire. . . . 278 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 Boxes O.1 Major requirements of Rwanda’s income aspirations. . . . . . . . . . . . . . . . . . . . . . . 10 O.2 The importance of regional value chains for growth and outward orientation in East Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 O.3 Opportunities in the region around Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 O.4 An international comparison of Rwanda’s long-term growth trajectory. . . . . . . . . 21 1.1 What is the role of social safety nets for economic growth? . . . . . . . . . . . . . . . . . . 54 1.2 Confronting a learning crisis in basic education: Key areas for action . . . . . . . . . . 65 1.3 Increasing access to education and training in the Republic of Korea. . . . . . . . . . . 67 1.4 Achieving world-class education in Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 1.5 Lessons from China: Teacher management in Shanghai . . . . . . . . . . . . . . . . . . . . . 70 1.6 Technology for improving teachers’ English skills . . . . . . . . . . . . . . . . . . . . . . . . . . 72 1.7 A strong foundation in basic education for transforming TVET in Singapore . . . . . 75 1.8 Partnering with firms to invest in workforce skills in Malaysia . . . . . . . . . . . . . . . . 76 1.9 Developing skills for economic growth and transformation in the “Asian Tiger” economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 1.10 Achieving high-quality tertiary education in the Republic of Korea . . . . . . . . . . . . 83 2.1 Transformation of the coffee sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 2.2 Stimulating product upgrading through a supplier development program . . . . . . 112 2.3 The benefits of a mutual recognition agreement for Rwanda’s engineering professional body. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 2.4 The strategy to transform the textiles, apparel, and leather sector . . . . . . . . . . . . 126 3.1 Seoul becomes a global city . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 3.2 Measuring urbanization in Rwanda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 3.3 Avoiding slums through property rights and infrastructure . . . . . . . . . . . . . . . . . . 154 3.4 The New York grid: Transformation of structures and the economy around a planned grid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 3.5 Land readjustment for urban renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 3.6 How will urban mobility change by 2050?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 3.7 Examples of successful engagement by large cities with the informal sector. . . . . 160 3.8 Mobilizing rural-urban links: Chengdu’s coordinated development model. . . . . . 161 3.9 Land value capture: The rail + property program in Hong Kong SAR, China . . . . 163 3.10 Land value capture in East Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 3.11 Updating land values in Bogotá, Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 3.12 Institutions for market-responsive urban planning: Yokohama, Japan. . . . . . . . . 165 3.13 Participatory planning and budgeting: Kerala, India . . . . . . . . . . . . . . . . . . . . . . . 166 3.14 Involving stakeholders in city development: Lessons on participatory planning from global cities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 3.15 Cross-district governance: The Republic of Korea’s happy living zones . . . . . . . . 167 4.1 Is informal normal? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 4.2 The global context and technological transformation. . . . . . . . . . . . . . . . . . . . . . 184 4.3 The national innovation system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 viii FUTURE DRIVERS OF GROWTH IN RWANDA 4.4 Rwanda’s Long-Term Saving Scheme: Opportunities and challenges . . . . . . . . . . 189 4.5 Institutional framework for PPPs: An international perspective . . . . . . . . . . . . . . 194 4.6 Targeted interventions in the Republic of Korea. . . . . . . . . . . . . . . . . . . . . . . . . . 197 4.7 “Made in Rwanda” policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 4.8 Developing Rwanda’s mining sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 4.9 The importance of firm capabilities for productivity: Examples from Brazil, India, and Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 4.10 The experience of Apps.co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 4.11 Kigali Innovation City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 5.1 High-value tea development in Yunnan Province, China . . . . . . . . . . . . . . . . . . . 226 5.2 Horticulture and floriculture exports from East Africa. . . . . . . . . . . . . . . . . . . . . 228 5.3 Successful restoration of the productive landscape on China’s Loess Plateau . . . . 235 5.4 Israeli success at being more efficient with agricultural water. . . . . . . . . . . . . . . . 237 6.1 A major turnaround in the Rwandan civil service . . . . . . . . . . . . . . . . . . . . . . . . . 256 6.2 Imihigo: A Rwandan management tool of accountability. . . . . . . . . . . . . . . . . . . 258 6.3 Relationship between trust and long-term development. . . . . . . . . . . . . . . . . . . . 259 6.4 Lessons from East Asia on strengthening public administration . . . . . . . . . . . . . 266 6.5 The role of competition policy in regulatory reform in the Republic of Korea . . . 268 Figures ES.1 Future drivers of Rwanda’s growth: Innovation, integration, agglomeration, and competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiii O.1 Rwanda’s global rankings on Ease of Doing Business indicators . . . . . . . . . . . . . . . . 3 O.2 Average growth of GDP per capita in Rwanda and select countries, 2006–16 . . . . . 4 O.3 Sectoral labor productivity and annual change in share of employment in Rwanda, 2000–16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 O.4 Human capital outcomes in Rwanda and other countries, by income level, 2015. . . . . 6 O.5 Average gross domestic savings rate for Rwanda and regional comparators, 2014–16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 O.6 Rwanda’s domestic savings and investment rates, 1995–2015 . . . . . . . . . . . . . . . . . 6 O.7 Labor productivity and GDP per capita in Rwanda and other countries . . . . . . . . . 6 O.8 Total factor productivity (TFP) and GDP per capita in Rwanda and other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 O.9 Average growth of labor productivity in Rwanda, by sector, 2001–16. . . . . . . . . . . 7 O.10 Price levels and GDP per capita in Rwanda and comparator countries and economies, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 O.11 Manufacturing value added in the East African Community, 2006–16. . . . . . . . . . . 8 O.12 Projected GDP per capita for Rwanda under alternate growth scenarios, 2016–50. . . . 9 O.13 Measures of global vertical integration in Rwanda, 1995–2014. . . . . . . . . . . . . . . 14 O.14 Share of global net outflows of foreign direct investment, by region, 1994–2016. . . . . 17 O.15 Growth scenarios for Rwanda and share of the population, by consumption category, by 2040. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 O.16 Labor productivity gaps in Rwanda, by sector, 2014 . . . . . . . . . . . . . . . . . . . . . . . 19 O.17 Future drivers of Rwanda’s growth: Innovation, integration, agglomeration, and competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 BO.4.1 GDP per capita in Rwanda and select countries and economies. . . . . . . . . . . . . . . 21 O.18 Early-grade “bulge index” in Rwanda and select countries. . . . . . . . . . . . . . . . . . 24 O.19 Projected share of Rwanda’s workforce with tertiary education under two growth scenarios, 2010–50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 O.20 Exports as a share of GDP and log GDP per capita in Rwanda, 2000–16 . . . . . . . 28 FULL CONTENTS OF FUTURE DRIVERS OF GROWTH IN RWANDA ix O.21 Intra-bloc goods imports as a share of GDP before and after joining the bloc . . . . 29 O.22 Changes in urbanization and income in East Asia and Pacific and in Sub-Saharan Africa, 1985–2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 O.23 Share of firms in Rwanda, by firm size, 2011 and 2014 . . . . . . . . . . . . . . . . . . . . . 36 O.24 Resource misallocation in formal manufacturing in Rwanda and select countries. . . . 37 O.25 Decomposition of sources of agricultural growth in Rwanda, 1961–2014. . . . . . . 39 O.26 Benchmarking of Rwanda along the various dimensions of governance. . . . . . . . . 42 O.27 A framework for assessing effectiveness of state institutions in Rwanda . . . . . . . . . 44 1.1 Human capital outcomes in Rwanda and other countries, by income level, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 1.2 Rates of human capital in Rwanda and the Republic of Korea at similar income levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 1.3 The array of human capital investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 1.4 The trade-off between lower returns now and higher returns later. . . . . . . . . . . . . 53 1.5 Stunting rate in Rwanda versus the world, 1995–2015. . . . . . . . . . . . . . . . . . . . . 54 1.6 Prevalence of stunting and GDP per capita, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . 55 1.7 Prevalence of stunting in Rwanda, by wealth quintile, 2000–15 . . . . . . . . . . . . . . 55 1.8 Reduction in stunting in countries with less than 50 percent stunting . . . . . . . . . . . 57 1.9 Projected reduction in stunting in Rwanda, 2000–35. . . . . . . . . . . . . . . . . . . . . . . 58 1.10 School completion rates in primary and secondary school in Rwanda compared with countries at different levels of income, 2017 . . . . . . . . . . . . . . . 61 1.11 Early-grade “bulge index” in Rwanda and select countries. . . . . . . . . . . . . . . . . . 62 1.12 Gap between actual and learning-adjusted years of schooling in select countries and economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 1.13 Key proximate determinants of learning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 1.14 Lag in teacher salaries in Rwanda, by primary and secondary levels. . . . . . . . . . . 66 1.15 Current and projected primary and lower-secondary completion in Rwanda, 2000–35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 1.16 Enrollment in secondary TVET, by region and within Africa, circa 2000 and 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 1.17 Conceptual framework outlining the links between higher education and economic growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 1.18 Projected share of Rwanda’s workforce with tertiary education under two growth scenarios, 2010–50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 1.19 Current and projected tertiary enrollment in Rwanda, 2000–35. . . . . . . . . . . . . . 80 1.20 Number of Rwandan scientific publications available on the Web of Science, 1970–2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 1.21 Tertiary enrollment rate as a function of secondary completion rates . . . . . . . . . . 81 1.22 Spending on tertiary education in Rwanda versus other countries, circa 2000 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 1.23 Current spending on education and health in Rwanda relative to other countries in the world. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 2.1 Rwanda’s Ease of Doing Business Ranking, 2007–19. . . . . . . . . . . . . . . . . . . . . . . 93 B2.1.1 Number of coffee-washing stations and average price of coffee cherries in Rwanda, 2002–15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 2.2 Value of Rwandan exports, by destination, 2001–16. . . . . . . . . . . . . . . . . . . . . . . 96 2.3 Exports of Rwandan goods, by destination, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . 97 2.4 Agroprocessing and other manufacturing as a share of total exports in Rwanda, 2005–16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 2.5 Ranking of revealed comparative advantage for East African Community countries, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 x FUTURE DRIVERS OF GROWTH IN RWANDA 2.6 Value and volume index of Rwandan commodity exports, 2000–15 . . . . . . . . . . . 99 2.7 Share of export value in Rwanda, 2009–16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 2.8 Labor productivity in Rwanda, 2005 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . 100 2.9 Rwanda’s financing stock, by sector, 2006–15 . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 2.10 Exports as a share of GDP and log GDP per capita in Rwanda, 2000–16 . . . . . . 101 2.11 Cumulative exports as a share of GDP in Rwanda, 2005–16, and potential trajectory to upper-middle-income status by 2035 . . . . . . . . . . . . . . . . . . . . . . 106 2.12 Intra-bloc goods imports as a share of GDP before and after joining the bloc . . . . . 107 2.13 Total imports of exporting versus nonexporting firms in Rwanda, 2008–14 . . . . 108 2.14 Impact of One Network Area on mobile phone traffic between Rwanda and Kenya. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 2.15 Average transport time, by route . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 2.16 Transport rates for a 40-foot container, by route . . . . . . . . . . . . . . . . . . . . . . . . . 116 2.17 Tertiary gross enrollment rate and log services exports per capita, 2000–16 . . . . 123 2.18 Upper-secondary completion rate and log services exports per capita, 2000–16. . . . 123 2.19 Number of professionals per 100,000 inhabitants in select African countries. . . . 124 2.20 FDI stock as a share of GDP in select East African countries, 2000–16 . . . . . . . . 125 3.1 Changes in urbanization and income in East Asia and Pacific, 1985–2010. . . . . . 138 3.2 Contribution of urbanization to structural transformation and labor productivity in Rwanda, 2002–12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 3.3 Simulated changes in growth outcomes with faster urbanization in Rwanda . . . . 141 3.4 Puga Index of connectedness in Kigali and select comparators. . . . . . . . . . . . . . . 144 3.5 Share and scale of rural-urban migration in Rwanda, 2014 . . . . . . . . . . . . . . . . . 149 3.6 Remittances from Kigali (and other locations) to rural areas of Rwanda, by province. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 B3.5.1 Land readjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 4.1 Share of firms in Rwanda, by firm size, 2011 and 2014 . . . . . . . . . . . . . . . . . . . . 172 4.2 Share of employment in Rwanda, by firm size, 2011 and 2014 . . . . . . . . . . . . . . 172 4.3 Share of firms and employment in Rwanda, by year of establishment . . . . . . . . . . 173 4.4 Share of firms and employment in Rwanda, by sector, 2011 and 2014. . . . . . . . . 173 4.5 Informality as a share of total firms and employment in Rwanda, 2011 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 B4.1.1 Informal employment as a share of GDP per capita in Latin America and Southeast Asia, various years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 4.6 Number of formal firms and total employment in Rwanda, by type of firm, 2011–16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 4.7 Number and share of exporters in Rwanda, by sector, 2015 . . . . . . . . . . . . . . . . 176 4.8 Price levels and GDP per capita in Rwanda and comparator countries and economies, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 4.9 Average lending and deposit rates in Rwanda, 2000–17 . . . . . . . . . . . . . . . . . . . 178 4.10 Cost of electricity in Rwanda and other Sub-Saharan African countries, 2016. . . . . 179 4.11 Rwanda’s global rankings on Ease of Doing Business indicators . . . . . . . . . . . . . . 179 4.12 Labor productivity and GDP per capita in Rwanda and other countries. . . . . . . 180 4.13 Average growth of labor productivity in Rwanda, by sector, 2001–16. . . . . . . . . 181 4.14 Total factor productivity and GDP per capita in Rwanda and other countries . . . . . 181 4.15 Resource misallocation in formal manufacturing in Rwanda and select countries . . . . 182 4.16 Probability of receiving tax incentives in Rwanda, by size of firm revenue, 2013–16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 4.17 Sectoral revenue growth and tax incentives in Rwanda, 2010–16. . . . . . . . . . . . 183 4.18 Correlation between innovation capacity and total factor productivity . . . . . . . . 184 FULL CONTENTS OF FUTURE DRIVERS OF GROWTH IN RWANDA xi B4.3.1 The national innovation system as an ecosystem for economywide innovation. . . . . 185 4.19 Ranking of Rwanda and other East African Community countries on the Global Innovation Index, 2013 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . 186 4.20 Frontier of innovation capacity in Rwanda, South Africa, and Switzerland . . . . . 186 4.21 Quality of research institutions and number of patent applications in Rwanda and other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 4.22 Number of trademark applications and registrations in Rwanda, 2001–15 . . . . . 188 4.23 The capabilities escalator: A framework to support innovation and entrepreneurial activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 5.1 Decomposition of sources of agricultural growth in Rwanda, 1961–2014. . . . . . 221 5A.1 Heuristic diagram of the production possibility frontier. . . . . . . . . . . . . . . . . . . . 243 6.1 Relationship between government effectiveness and level of development . . . . . . 253 6.2 Benchmarking of Rwanda along the various dimensions of governance. . . . . . . . 254 6.3 Correlation between prosecution of office abuse and GDP per capita . . . . . . . . . . 254 6.4 Revenue (tax and nontax) excluding grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 6.5 Rwanda’s decentralization framework for service delivery. . . . . . . . . . . . . . . . . . 257 6.6 A framework for assessing effectiveness of state institutions in Rwanda . . . . . . . . 259 6.7 Rwanda’s performance on product market regulations . . . . . . . . . . . . . . . . . . . . . 262 6.8 Public and publicly guaranteed debt as a percentage of GDP in Rwanda, 2010–17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 6.9 The main elements for an efficient and capable civil service . . . . . . . . . . . . . . . . . 266 6A.1 Territorial organization in Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 6B.1 Gross fixed capital formation as a share of GDP in Rwanda, 1965–2015. . . . . . 277 Maps 1.1 Prevalence of stunting in Rwanda, by district, 2014–15. . . . . . . . . . . . . . . . . . . . . 55 3.1 Visualizing economic concentration across five countries . . . . . . . . . . . . . . . . . . 139 3.2 Fragmentation of densities beyond the central business district of Kigali . . . . . . . 145 3.3 Built land in Kigali, 1990, 2000, and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 3.4 Building footprint in central areas of three secondary cities in Rwanda . . . . . . . . 146 3.5 Location of formal jobs in Kampala, Uganda; Lusaka, Zambia; and Kigali, Rwanda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 3.6 Changes in building stock in Kigali, by cell, 2009–15 . . . . . . . . . . . . . . . . . . . . . . 147 3.7 Simulated change in access to employment in Kigali with a 50 percent drop in bus journey speed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 3.8 Location of planned imidugudu (grouped villages) in 12 districts of Rwanda, 2016–17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 3.9 Variation in tomato prices in western Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . 151 3.10 Expressways in the Republic of Korea, 1970–2015 . . . . . . . . . . . . . . . . . . . . . . . 152 3.11 Goldilocks density: Getting density “just right” through fine-grain differentiation and adaptation over time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 B3.4.1 Plan of Manhattan, New York City, 1811 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 3.12 Concentrated urban development and universal basic services in the Republic of Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 Photos B3.5.1 Way-markers map plot boundaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 B3.5.2 Land readjustment sites in Gahanga, Kigali . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 B5.3.1 China’s Loess Plateau, 1990 and 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 xii FUTURE DRIVERS OF GROWTH IN RWANDA Tables O.1 Social and economic indicators in Rwanda compared with low- and middle-income-country averages, 1994 and 2015. . . . . . . . . . . . . . . . . . . . . . . . . 5 BO.1.1 Aspirational high-growth scenario for Rwanda: Demand-side requirements, 2000–35. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 BO.1.2 Aspirational high-growth scenario for Rwanda: Productivity requirements . . . . . . 11 BO.1.3 Aspirational high-growth scenario for Rwanda: Sectoral share of employment, 2000–35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 BO.1.4 Aspirational high-growth scenario for Rwanda: Sectoral share of GDP, 2000–35. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.1 Distribution of tertiary students in Rwanda, by field of study. . . . . . . . . . . . . . . . 82 2.1 Ease of Doing Business 2019 ranking for Rwanda and average for the East African Community. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 2.2 Rwandan exports, by sector, 2005 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 2.3 Decomposition of merchandise export growth, 2008–13 . . . . . . . . . . . . . . . . . . . 99 2.4 Manufacturing subsectors, grouped by pro-development characteristics . . . . . . . . 103 2.5 Labor costs in manufacturing in select countries . . . . . . . . . . . . . . . . . . . . . . . . . 103 2.6 Service subsectors in Rwanda, grouped by pro-development characteristics. . . . . 104 2.7 Rwanda’s labor productivity and participation in the external sector, 2015. . . . . 108 2.8 Cost of electricity in 2016 in select East African Community countries . . . . . . . . 114 2.9 Stock of foreign direct investment in Rwanda, by sector, 2015. . . . . . . . . . . . . . . 125 3.1 Share of firms in Kampala, Uganda; Lusaka, Zambia; and Kigali, Rwanda, by size, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 4.1 Efficiency and profitability of banks in Rwanda and other East African Community countries, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 4.2 Share of total tax revenue for firms, by return on investment with and without incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 4.3 Large exposures in the banking sector in Rwanda, 2015–17 . . . . . . . . . . . . . . . . 191 4.4 State-owned enterprise policy initiatives in the OECD since 2006 . . . . . . . . . . . . 202 4.5 Use of science, technology, and innovation funding initiatives in Rwanda . . . . . . 209 5.1 Rwanda’s main agricultural exports, 2012/13 to 2015/16 . . . . . . . . . . . . . . . . . . 227 B5.2.1 Exports to Europe of flowers, vegetables, and fruits from select African countries, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 5.2 Indicators of comparative advantage for select crops in Rwanda, 2016 . . . . . . . . 230 5.3 Exports of Irish potatoes and green beans by Rwanda and select African competitors, 2003 and 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 5.4 Response of demand to a 1 percent increase in household income in Rwanda, by degree of urbanization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 6.1 The Rwanda Governance Scorecard: Scores for 2016 compared with previous scores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 6.2 Components and ratings of public investment management framework. . . . . . . . 255 Foreword A widely acknowledged record of more on the future drivers of growth to inform than two decades of strong eco- Rwanda’s Vision 2050. The report identifies nomic growth—including a three- four essential and interdependent drivers: and-half-fold increase in per capita income innovation, integration, agglomeration, and since 1994—has placed Rwanda among the competition. These future drivers of growth, fastest-growing economies in Africa and in turn, would receive the necessary boost the world. Traumatic memories of the 1994 from reforms in six priority areas: (a) human genocide, still prevalent, are gradually fading, capital development; (b) export dynamism and as associations begin to take a more positive regional integration; (c) well-managed urban- form—of a nation on the rise, powered by ization; (d) competitive domestic enterprises; human resilience, a sense of common pur- (e) agricultural modernization; and (f) capable pose, and a purposeful government. and accountable public institutions. Having launched its development with The report has already helped to shape the a measure of success, Rwanda is now keen reform agenda in all of the above six prior- to forge a future of security, prosperity, and ity areas. The study has been conducted at modernity. Sustaining high rates of inclu- the same time Rwanda was developing its sive economic growth is at the heart of national strategy for transformation (2017– these ambitions. Future aspirations in this 2024) and Rwanda Vision 2050. Both have regard are high, with Vision 2050 aspiring to been informed by recommendations from achieve upper-middle-income status by 2035 the study. For example, the report’s find- and high-income status by 2050. These aspi- ings about challenges facing Rwanda in rations translate into average annual growth human capital motivated the government to rates of more than 10 percent. redouble its efforts by fighting malnutrition, Motivated by these aspirations, in May launching reforms for improving the quality 2017, the government of Rwanda and the of education at all levels, and establishing World Bank Group jointly initiated this study the National Early Childhood Development FUTURE DRIVERS OF GROWTH IN RWANDA xiii xiv FUTURE DRIVERS OF GROWTH IN RWANDA Program to coordinate all interventions on of this report. We are convinced that keeping early childhood development and fighting the momentum in implementing the recom- malnutrition. mendations offered will support Rwanda’s We are delighted by the close partnership development journey and take it closer to the forged between the experts from Rwanda transformed society it aspires to be. and the World Bank Group in preparation Hafez M. H. Ghanem Dr. Ngirente Edouard Vice President, Africa Region Prime Minister of the Republic of Rwanda The World Bank Acknowledgments F   uture Drivers of Growth in Rwanda: Transformation and Rwanda Vision 2050 Innovation, Integration, Agglomeration, provided guidance to the team and validated and Competition is a joint initiative of the report. the Government of Rwanda and the World A joint Rwanda–World Bank Group Bank Group, emanating from a March 2017 team was established to prepare the report. agreement between President Paul Kagame of Team leaders were Leonard Rugwabiza Rwanda and Jim Yong Kim, President of the Minega (Economic Advisor to the Minister World Bank Group. of Finance and Economic Planning) and The report was written by a joint Rwanda- Sandeep Mahajan (Practice Manager, World Bank Group team under the supervi- Macroeconomics, Trade and Investment sion and guidance of Uzziel Ndagijimana Global Practice, World Bank Group). (Minister of Finance and Economic Planning), Financial support from the Republic of Claver Gatete (Minister of Infrastructure and Korea is gratefully acknowledged. Former Minister of Finance and Economic William Maloney (Chief Economist, Planning), the late Jan Walliser (Former Vice Equitable Growth, Finance, and Institutions President, Equitable Growth, Finance, and Practice Group, World Bank Group), Institutions Practice Group, World Bank Richard Newfarmer (Country Director for Group), Makhtar Diop (Vice President for Uganda and Rwanda, International Growth Infrastructure and Former Vice President for Centre), and Andrew Nyamvumba (Former Africa Region, World Bank Group), Hafez Head, Strategy and Policy Unit, Office of M. H. Ghanem (Vice President for Africa the President, Republic of Rwanda) were Region, World Bank Group), Diarietou Gaye senior advisers for the report. The report (Director of Strategy and Operations of also benefitted from valuable comments from Africa Region and Former Country Director peer reviewers David Dollar (Senior Fellow, for Rwanda, World Bank Group), Ceyla John L. Thornton China Center, Brookings Pazarbasioglu-Dutz (Vice President, Equitable Institution), Mona Haddad (Director, Growth, Finance, and Institutions Practice International Finance Corporation), Steve Group, World Bank Group), and Carlos Felipe Jaffee (Lead Agriculture Economist, World Jaramillo (Country Director for Rwanda and Bank Group), Godfrey Kabera (Director Former Senior Director, Macroeconomics, General, National Planning and Research, Trade and Investment Global Practice, Ministry of Finance and Economic Planning), World Bank Group). The National Steering Michael Woolcock (Lead Social Scientist, Committee for the National Strategy for World Bank Group), and Albert Zeufack FUTURE DRIVERS OF GROWTH IN RWANDA xv xvi FUTURE DRIVERS OF GROWTH IN RWANDA (Chief Economist for Africa Region, World Finance and Economic Planning), and Bank Group), as well as the following Ariane Zingiro (Planning and Program reviewers who provided comments on the Sp e cia l ist , M i n ist r y of Fi na nce a nd concept note and the decision draft: Emre Economic Planning). Alper (Senior Economist, International The report was edited by William Shaw. Monetary Fund), Iftikhar Malik (Senior Production and publication were managed Social Protection Specialist, World Bank by Stephen Pazdan and Patricia Katayama of Group), Laura Rawlings (Lead Social the World Bank Group’s Formal Publishing Protection Specialist, World Bank Group), Program. Laure Redifer (Deputy Division Chief, The report has an overview and six chap- International Monetary Fund), and Alun ters written by individual chapter teams, Thomas (Former Resident Representative in whose members are presented in alphabetical Rwanda, International Monetary Fund). order by their surnames. We ex tend specia l t ha n ks for t he insights and recommendations received from Abebe Adugna (Practice Manager, Overview Macroeconomics, Trade and Investment, Lead authors: Sandeep Mahajan (Practice World Bank Group), Anstes Agnew (Country Manager, Macroeconomics, Trade and Head for Rwanda at Tony Blair Institute for Investment, World Bank Group) and Leonard Global Change), Yasser El-Gammal (Country Rugwabiza Minega (Economic Advisor to the Manager for Rwanda, World Bank Group), Minister of Finance and Economic Planning). Obald Hakizimana (Economist, Ministry of Finance and Economic Planning), Mary Hallward-Driemeier (Senior Economic Chapter 1: Human Capital and Adviser, World Bank Group), Emmanuel Innovation H at e g e k a ( D e put y C h i e f E x e c ut ive Lead authors: David Evans (Lead Economist, Officer, Rwanda Development Board), World Bank Group) and François Ngoboka Thierry Mihigo Kalisa (Senior Economist, (Division Manager, Former Capacit y M i n i s t r y of Fi n a nc e a nd E c onom ic Development and Employment Services Planning), Danny Leipziger (Managing Board). Director of Growth Dialogue and Professor Core team: Rose Baguma (Director of Practice of International Business, George General of Education Policy and Planning, Washington University), Norman V. Loayza M i n i s t r y of E duc at ion), D r. I g n ac e (Lead Economist, World Bank Group), Johan Gatare (Principal, College of Science and A. Mistiaen (Program Leader, World Bank Technology, University of Rwanda), Deepika Group), Geraldine Mukeshimana (Minister Ramachandran (Consultant), Jee-Peng Tan for Agriculture and Animal Resources), (Consultant), and Fei Yuan (Consultant). Ildephonse Musafiri (Head of the Strategy and Policy Unit, Office of the President, Republic of Rwanda), Richard Mushabe Chapter 2: Transformation (Division Manager of National Planning through Trade: Using Exports and Research Division, Ministry of Finance and Regional Integration to and Economic Planning), Tom O’Brien (Senior Adviser, World Bank Group), Amina Drive Future Growth Rwakunda (Chief Economist, Ministry Lead authors: Thomas R. Kigabo (Chief of Finance and E conom ic Plan ning), Economist, National Bank of Rwanda), Kampeta Pitchette Sayinzoga (Director Richard Newfarmer (Country Director, General, National Industrial Research International Growth Centre), and Victor and Development Agency of Rwanda), Steenbergen (Former Country Economist, Claudine Uwera (State Minister, Ministry of International Growth Centre). A c k nowledg m ents xvii Core team: John H. Arnold (Consultant), (Senior Economist, World Bank Group), Robert Opirah (Director General for Trade Peace Aimée Niyibizi (Economist, World and Investment, Ministry of Trade and Bank Group), Pierre Sauve (Senior Private Industry), and Cordula Rastogi (Senior Sector Specialist, World Bank Group), Economist, World Bank Group). and Marcio Jose Vargas da Cruz (Senior Economist, World Bank Group). The chapter builds on background papers Chapter 3: Faster Urbanization, and notes prepared by David Bridgman Greater Agglomeration (Lead Private Sector Specialist, World Bank Group), Joern Huenteler (Energy Specialist, Lead authors: Narae Choi (Urban Specialist, World Bank Group), Maksym Iavorskyi World Bank Group), Edward Kyazze (Manager (Operations Analyst, World Bank Group), of Urbanization and Human Settlements Danny Leipziger (Managing Director of Division, Ministry of Infrastructure), Somik Growth Dialogue and Professor of Practice of V. Lall (Lead Urban Economist, World Bank International Business, George Washington Group), and Sally Beth Murray (Former U n i ve r s i t y), H i b r e t B e l e t e M a e m i r Senior Country Economist, International (Economist, World Bank Group), William Growth Centre). Peter Mako (Consultant), Hoza Thierry The chapter builds on an International Ngoga (Consultant), Ha Minh Nguyen Food Policy Research Institute (IFPRI) (Economist, World Bank Group), Yadviga research paper by Xinshen Diao, Peixun Viktorivna Semikolenova (Senior Energy Fang, Josée Randriamamonjy, and James Economist, World Bank Group), Victor Thurlow and on background notes by David Steenbergen (Former Country Economist, Bridgman (Lead Private Sector Specialist, International Growth Centre), Desiree Van World Bank Group) and Hoza Thierry Welsum (Consultant), Jan Erik von Uexkull Ngoga (Consultant). (Senior Economist, World Bank Group), and Ezequiel Zylberberg (Consultant). Chapter 4: Competitiveness and Enterprise Development for Chapter 5: Transitioning Innovation-Led Growth Agriculture and Food as an Lead authors: Claire Honore Hollweg (Senior Engine of Growth Economist, World Bank Group), Aghassi Lead authors: Christopher L . Delgado Mkrtchyan (Senior Economist, World Bank (Consultant) and Dr. Octave Semwaga Group), Jani Moliis (Former Country Head (Director General of Planning, Ministry of for Rwanda at Tony Blair Institute for Global Agriculture and Animal Resources). Change), and Jean Louis Uwitonze (Former Core team: Winston Dawes (Senior Director General of Planning, Ministry of A g r ic u lt u re E conom ist , World B a n k Trade and Industry). Group), Aparajita Goyal (Senior Economist, Core team: Teymour Abdel Aziz (Senior World Bank Group), Christopher Jackson Financial Sector Specialist, World Bank (Senior Agriculture Specialist, World Bank Group), Brice Gakombe (Financial Sector Group), and Aimée Marie Ange Mpambara Specialist, World Bank Group), Justin (Ag ricult u ral Specialist , World Ban k Piers William Hill (Senior Private Sector Group). Specialist, World Bank Group), Louise The chapter builds on an International Kanyonga (Head, Competitiveness and Food Policy Research Institute (IFPRI) Business Reforms, Rwanda Development research paper by Xinshen Diao, Peixun Board), Hibret Belete Maemir (Economist, Fang, Josée Randriamamonjy, and James World Ban k Group), G au rav Nay ya r Thurlow. xviii FUTURE DRIVERS OF GROWTH IN RWANDA Chapter 6: Capable and Group), David Bridgman (Lead Private Sector Accountable State Institutions Specialist, World Bank Group), Maksym Iavorskyi (Operations A nalyst, World Lead authors: Shyaka Anastase (Former Bank Group), and Hoza Thierry Ngoga Chief Executive Officer, Rwanda Governance (Consultant). Board), Nicoletta Feruglio (Senior Public Administration and coordination activities Sector Specialist, World Bank Group), and were managed by Lydie Ahodehou (Program Gael J. R. F. Raballand (Lead Public Sector Assistant, World Bank Group) and Sylvie Specialist, World Bank Group). Ingabire (Executive Assistant, World Bank Core team: Monica Beuran (Consultant), Group). Deborah Hannah Isser (Lead Governance It is w it h g reat pleasu re t hat t he Specialist, World Bank Group), and Felicién Government of Rwanda and the World N s e n g u mu k i z a ( H e ad , G over n a n c e , Ban k Group introduce the repor t Research, and Monitoring Department, Future Drivers of Growth in Rwanda: Rwanda Governance Board). Innovation, Integration, Agglomeration, The chapter builds on background papers and Competition. We hope that Rwandan by Jonathan Argent (Consultant), Tania citizens and all actors of development in Begazo (Senior Economist, World Bank Rwanda will find it useful. Executive Summary R wanda: the land of a thousand hills, untold beauty, a poignant past, and boundless ambition. It has, in a way, become an important fragment of modern consciousness. Traumatic memories of the 1994 genocide against the Tutsi, still prevalent, are fading gradually, as associations begin to take a more positive form: a nation on the rise, powered by human resilience, a sense of common purpose, and a purposeful government. Past successes, combined with a sense of frailty, have fueled bold ambitions for the future. But these are early days, and Rwanda is keen to continue taking meaningful strides toward becoming a more hopeful, secure, modern, and prosperous nation. Strong and inclusive growth sustained over an extended period is at the heart of these ambitions. This report—a joint undertaking by experts from Rwanda and the World Bank—seeks to evaluate the country’s possibilities and options in this endeavor. Introduction fastest-growing economies, surpassed on the continent only by Ethiopia. Equally striking After 1994 everything was a priority and are its ambitions and approaches. In ambi- our people were completely broken. But we made three fundamental choices that guide tion, it models itself after the East Asian us to this day. One—we chose to stay Tigers, seeking a development trajectory together. Two—we chose to be accountable to take it from abject poverty to prosperity to ourselves. Three—we chose to think big. within a couple of generations. In approach, it has adopted high standards and demands —His Excellency President Paul Kagame discipline, self-reliance, and hard work of in a speech on the 20th Commemoration itself—its formula for escaping the vortex of genocide against the Tutsi of the ­ low expectations, corruption, and chaos that (April 7, 2014) it rejected early on. Having launched its development with Every country, born of unique circumstances, a measure of success, Rwanda is now keen can claim with good justification to be spe- to forge a future of security, prosperity, cial. Rwanda’s claims are self-evident in both and modernity. Sustaining high rates of what is manifest and what is being sought. ­ inclusive economic growth is at the heart of A strong and widely acknowledged record of these ambitions. Future aspirations in this economic success—­ including a three-and-a- regard have been set extremely high. Recent half-fold increase in per capita income since formulations of Vision 2050 set a target 1994—places Rwanda among the world’s of achieving upper-middle-income status FUTURE DRIVERS OF GROWTH IN RWANDA xix xx FUTURE DRIVERS OF GROWTH IN RWANDA by 2035 and high-income status by 2050. include better-targeted family planning mea- These aspirations translate into average sures and continued emphasis on female edu- annual growth rates of more than 12 ­percent cation, health, and economic empowerment (more than 10 percent in per capita terms). (United Nations Population Fund 2017). New technologies associated with indus- try 4.0—robotics, the Internet of Things, Opportunities and Risks three-dimensional printing—will remain Bold aspirations require Rwanda to play disruptive for Rwanda (as for the rest of the closely to its strengths and make the most of world), presenting more risks and opportuni- all available opportunities, while judiciously ties, with Rwanda’s net benefits depending managing risks. Rwanda’s main endowment on its responses. The immediate gains for is its people, whose determination, agaciro Rwanda are from the adoption and diffusion (dignity), and strong sense of personal and of new technologies and improved produc- social responsibility should serve it well. How tion p­ rocesses, rather than the development well the country nurtures and deploys this of sophisticated research and development resource will determine its true potential. The ­ capabilities. On the one hand, to the extent country’s record of good economic gover- that the new technologies are labor saving, nance, policy coherence, and strong focus on they risk narrowing the scope for manufac- implementation also will prove useful. Major turing as a pathway to development. On the opportunities lie in favorable demographics, other hand, the diffusion and adoption of an emergent and rapidly urbanizing middle new technologies can help to leapfrog tradi- class (in Rwanda and regionally), a fertile tional enablers of development. For ­ example, (though hilly)1 agricultural landscape, and Zipline, which uses unmanned drones untapped regional and global market poten- to deliver critical medical supplies across tial that offers opportunities for economic spe- Rwanda, has the potential to overcome geo- cialization and scale economies that Rwanda graphical barriers and increase efficiency in otherwise lacks. Counterbalancing these distribution of medical supplies. Modern opportunities are challenges associated with services, enabled by information and com- being a small, landlocked economy and risks munication technology and sharing the spe- from regional security and stability, a poten- cial characteristics (scalability, international tial widening of domestic disparities, intensi- tradability, and amenability to technological fying population pressures, and global climate upgrading) that allowed productivity conver- change. gence in manufacturing, are another area of Rwanda’s population dynamics present a opportunity, with business process outsourc- significant domestic challenge and possibly ing, banking, and health care as examples. also an opportunity. Rwanda is a youthful Future growth has to be powered by trade nation, with a median age of just 19 years, and regional integration. As a small, land- a result of rapid demographic shifts that are locked economy, Rwanda does not have the influenced by relatively high but declining scale economies to sustain high growth on fertility rates and sharp reductions in child its own. It has to stay alert to major shifts in mortality. But there also are legitimate con- ­ patterns of global trade and production. For cerns regarding the pace of rising popula- one, the global value chains are maturing and tion density, already the highest in mainland losing momentum since the “unbundling of Africa, and the growing population pressures production” has largely already happened on the country’s environment and limited (OECD 2017). At the same time, production is natural resources. Managed well, the popu- becoming increasingly concentrated in regional lation pressures can be contained, and the or local hubs closer to end markets: the share underlying demographic shifts can be har- of intra-African trade for most manufactur- nessed to achieve significantly higher growth ing industries rose between 2000 and 2014 and faster poverty reduction.2 Policy options (Hallward-Driemeier and Nayyar 2017). E x ecutive S u m m ar y xxi Fortunately for Rwanda, the region around it and innovations in the health sector, Rwanda abounds in (largely untapped) opportunities. could become a hub for modern medical Plus, with its landlocked geography as a lim- services for the region. Similarly, in higher iting factor, the ability of Rwandan firms to education, Rwanda has attracted top-flight compete globally depends on the “competitive- university subsidiaries, such as Carnegie ness” and ­ “connectedness” of its neighbors. Mellon. A recent grant from the Buffett Rwanda is thus likely to seize regional trade Foundation will enable the country to build opportunities through intraregional trade and a first-class agriculture school. Another logi- participation in regional value chains con- ­ cal services export, given Rwanda’s location, nected to the global market. could be mining services. The strongest regional opportunities The presence of new technologies and exist in commodity-based processing and business and trade opportunities bodes well, exports and services trade—what some have but it is not in itself enough to generate high called “industries without smokestacks” growth. This issue connects to the broader (Newfarmer, Page, and Tarp, forthcom- “productivity paradox,” whereby global pro- ing). Taken together, these activities hold the ductivity growth has slowed considerably promise of doing for Rwanda what manufac- since 2004 or so, even as new technologies turing did for East Asia. This promise applies have emerged and diffused at a rapid clip. particularly to agribusiness and food pro- Frustrated by a similar disconnect (between cessing, the only subsectors in which Rwanda massive investments in information technol- currently has a revealed comparative advan- ogy and productivity growth), Robert Solow, tage (Hallward-Driemeier and Nayyar 2017). a Nobel laureate in economics, famously These subsectors employ unskilled workers, said in 1987 (36), “You can see the computer have low intensity of physical capital, and age everywhere but in the productivity sta- exhibit high returns from the application of tistics.” The productivity statistics did pick basic research and development while, for up eventually, but only after a considerable now, being less exposed to automation. The lag in the mid-1990s. The missing link then, products (for example, wood products, bev- as it likely is now, was c ­ apabilities—of peo- erages) typically are traded regionally (rather ple, firms, and ­ institutions—that take time than internationally) because they are bulky to build. That missing link is also Rwanda’s to transport or require proximity to raw main challenge—and the focus of this materials (for example, food production). study—as the country seeks to harness the Rwanda could look to expand high-value new wave of technologies and trade patterns agricultural exports (such as horticulture)— for future high growth. Its investments in much like Peru has done with specialty this regard need to bring the core capabilities agricultural products such as artichokes, continually closer to the ever-moving global asparagus, and avocados, among others— frontier. even beyond the region, building on its repu- tation for having a superior regulatory and policy environment. An Agenda for Reform The region also offers major opportunities Rwanda’s aspiration for upper-middle income for trade in services, which already ­ provides by 2035 and high income by 2050 calls more than half of Rwanda’s export earn- for stretch targets for future growth rates. ings. While tourism has the most immediate Such targets may prove helpful in lifting the potential, Rwanda also could look toward nation’s vision and infusing a future orien- higher-skill services such as business process tation among the people, while mobilizing outsourcing, health care, and higher educa- citizen support and resources for the needed tion. Medical tourism is on the rise in Sub- economic reforms. This has to be supported Saharan Africa, as it is elsewhere (Dihel and with periodic and systematic review of goals Goswami 2016). With its many investments and targets, with an eye to reassessing their xxii FUTURE DRIVERS OF GROWTH IN RWANDA feasibility according to evolving trends and this will achieve the growth ambitions that with scope for readjustment if needed. Rwanda has. Any future high-growth strategy will A higher-order challenge is to boost pro- require a multisectoral approach. Relying on ductivity growth, which also has a bearing on manufacturing alone as a pathway for high Rwanda’s ability to maintain high investment growth clearly has become trickier than in rates. Rwanda’s labor productivity (output per the past. Services can offer significant scope worker) and total factor productivity (output for productivity gains (IMF 2018), but the generated by a given quantity of labor and service sector alone cannot yet absorb all capital) are low for its income level. Moreover, of the unskilled labor released by agricul- the rate of total factor productivity growth has ture. Moreover, important interdependen- slowed significantly in recent years. cies between sectors (most notably between The principal requirements for sustained services and manufacturing) prevent any one high productivity growth are scale econo- sector from growing too large without suf- mies and economic specialization in areas of ficient inputs from others—for example, in Rwanda’s comparative advantage, with com- China from 2000 to 2014, services inputs petition and technology diffusion as essential into manufacturing accounted for 38 ­ percent complements. These elements have proved of growth in services value added, while essential for sustaining high growth across manufacturing inputs into services accounted the world, but they are even more important for 30 percent. for a small, landlocked country like Rwanda. The reform agenda is complex and highly Scale and specialization require Rwanda to demanding: nothing short of an e ­ xtraordinary make the most of external opportunities and effort will suffice. The hard work begins in to enhance the benefits of urban agglomera- classrooms. The country needs a massive tion. But, to succeed in these areas, Rwanda effort to build human capital—its own educa- has to have a competitive domestic enterprise tion-focused Marshall Plan—if it is to realize sector, both public and private, with a strong its ambitious growth targets. With all of its potential to do well in competitive environ- achievements, Rwanda still lags the average ments. Such enterprises themselves have of low-income countries in crucial aspects of three critical requirements: a strong ecosys- human capital—for example, in stunting and tem for technological innovation, world-class primary and lower-secondary school comple- human capital, and robust institutions of tion. Moreover, the concern is as much about governance. This chain of priorities forms the quality as it is about quantity. 3 An impor- high-growth strategy for Rwanda. tant related issue is high stunting rates in Rwanda’s strategy for high growth thus early years—with implications for children’s has four essential and interdependent future learning abilities and participation in ­ d rivers—innovation, integration, agglom- the knowledge and services-led economy that eration, and competition (figure ES.1). These Rwanda envisages. future ­ d rivers of growth, in turn, would The next requirement is higher investment receive the necessary boost from reforms and savings rates. Rwanda already has a rela- in six high-­ priority areas: (1) human capi- tively high investment rate of about 26 ­percent tal development; (2) export dynamism and of GDP, well in excess of the domestic savings regional integration; (3) ­ w ell-managed rate of less than 10 percent. But double-digit urbanization; (4) competitive domestic enter- growth rates would require the investment rate prises; (5) agricultural modernization; and to be significantly higher. Achieving this level (6) ­capable and accountable public institu- of investment would require a sharp increase tions. The six reform areas are discussed in ­ ultifold in investment by the private sector; a m more detail in the next section. rise in the domestic savings rate; and higher Doing well on each of these six neces- foreign direct investment. Nothing short of sary reform areas is what separated the E x ecutive S u m m ar y xxiii FIGURE ES.1  Future drivers of Rwanda’s growth: rewarding success and punishing failure—a Innovation, integration, agglomeration, and model that the Republic of Korea closely fol- competition lowed in its early years of development. Highly developed Reform Priorities for High human Growth capital Trade and Competitive Reform Priority 1: Develop Higher- regional integration domestic Order Human Capital enterprises DRIVERS OF Building an innovation-led economy, as well GROWTH Innovation as getting the most out of greater integration Integration Agglomeration (especially services trade) and agglomera- Modern Competition Well- tion, will require much higher investments in agriculture/ managed human capital. Such investments, particu- food sector urbanization larly in the priority areas of reducing stunting Capable and and improving basic education, contribute to accountable growth only after considerable time, so mov- institutions ing on them early is essential for Rwanda’s growth aspirations. Building human capital involves a wide array of investments across the life cycle. high-growth East Asian economies from those Allocating more resources and providing bet- that achieved rapid growth for a decade or ter information on outcomes are key, together two, only to see it fizzle out. Even more chal- with making dramatic progress in the follow- lenging perhaps is to go beyond the necessary ing five policy areas: to the sufficient conditions. Rwanda sees rapid development not as a choice but as an existen- 1. Reduce stunting. A big push is needed tial matter and will be pushed to take high- to improve food security and nutritional risk strategic bets to gain high returns. These practices and to increase access to clean efforts have to be calibrated and managed water, good sanitation, and nutritional carefully. Unlike the East Asian economies, supplementation. Careful monitoring sys- Rwanda does not have the luxury of high tems are required to evaluate which poli- savings, which gives it far less scope to make cies deliver the greatest gains. costly mistakes. Policy responses first need to 2. E xpand access to basic educ ation . address key cross-cutting constraints (such as Achieving universal basic education skills, finance, infrastructure, and business requires ensuring that children are not regulation), clarify the future role of state- turned away for failure to pay incidental owned enterprises (SOEs), and then, if deemed fees, which may require increasing the per necessary, selectively pick areas for direct sup- student benefit paid to schools, and reduc- port that are aligned closely with Rwanda’s ing repetition in early grades so that chil- comparative advantages and focused on dren do not become too old for their grade export promotion rather than import sub- level. Providing information on the finan- stitution. Any direct support will have to set cial returns to schooling has been dem- clear policy objectives and performance tar- onstrated to increase parent and student gets for beneficiary firms; be coordinated investment in education, while improving closely across government e ­ ntities; and include the quality of schooling facilitates both a rigorous system for monitoring progress and reduced repetition and higher perceived enforcing sanctions as well as incentives for returns. xxiv FUTURE DRIVERS OF GROWTH IN RWANDA 3. Improve the qu alit y of educ ation . tradable sectors would boost scale economies Improved teaching practices are neces- and specialization and constitute an important sary to ensure that children in the first source of competition and innovation. three years are literate in Kinyarwanda Meeting Rwanda’s export objectives before transitioning to English. There is requires a comprehensive trade policy that good evidence regarding effective pro- spans services, industry, and agriculture. grams, including partially scripted lessons, Producing high-quality products for the on which Rwanda can draw. Because region (especially in manufacturing and these improvements take time, transition- agroprocessing) and developing other, less ing to English later (end of primary) may ­ location-dependent sectors (such as horti- be valuable. Rwanda could leverage its culture, tourism, professional services, and major investment in technology to pro- information and communication technology) vide upper-primary and secondary school for broader markets could do for Rwanda teachers with regular opportunities to what manufacturing did for East Asia from improve their English and to increase stu- the 1990s. These products are labor inten- dents’ learning performance. Recruiting sive, tradable, and capable of scale econo- expatriates may help to remedy the imme- mies; and they have high value added per diate shortage of teachers and train a core worker. As in traditional manufacturing, group of high-quality Rwandan teachers. technological change can occur quickly and 4. Strengthen technical and vocational train- drive rapid productivity growth. There are ing. Collecting and disseminating infor- five major priorities to meet medium-term mation on the quality of skills providers trade objectives: and the returns to different skills would improve quality and encourage participa- 1. Harness the regional blocs as platforms tion in high-return programs. for transformation. Key priorities are to 5. Build the tertiary sector and foster inno- lower and revise the common external vation . Increasing access to financing tariff within the East African Community (including private) would expand enroll- (EAC) to benefit Rwandan producers ment. Enrollment in high-return fields and consumers better, promote harmo- could be increased through financing nized standards in goods and services, incentives and higher-quality science and and reduce nontariff barriers. For key engineering instruction in earlier grades. sectors such as energy and finance, the Creating incentives for researchers to regional blocs should develop regional develop and to adapt innovations to value chains to achieve scale economies. b enefit industries and getting industries ­ Finally, Rwanda should advocate for to pay for the research are e ­ ssential stronger regional Economic Communities’ to reaping the maximum returns to secretariats to review and discuss potential innovation. violations of common market protocols. The recently agreed African Continental Free Trade Area can also be advantageous, Reform Priority 2: Establish Export once details are penned and implementa- Dynamism and Leverage Regional tion modalities agreed to. Integration 2. Closely monitor the exchange rate Although exports have grown rapidly and to maintain export competitiveness . diversified over the past decade, the sector Greater flexibility and close monitoring remains too small and narrow to achieve the of exchange rates are necessary to avoid country’s aspirations for growth. Development inadvertent episodes of overvaluation, of a more robust export sector serving both especially in regional markets. It may be regional and global economies and a renewed important to require the accommoda- effort to attract foreign direct investment in tion of import surges or the use of reserve E x ecutive S u m m ar y xxv accumulation to sterilize capital inflows. the reallocation of labor off-farm, without A first step is to undertake more analyti- the accompanying agglomeration economies cal work on the past relationship between essential for rapid growth of productivity. exchange rate policy and export growth, Policy should focus on delivering the fun- particularly for dynamic export sectors. damental drivers that link urbanization to 3. Invest in economic diplomacy. More robust economic growth. This approach investment in staff knowledge is needed means focusing on where to prioritize urban regarding how to prioritize, prepare for, development, what package of policies and and undertake external negotiations. investments to include, and who needs to 4. Improve trade connectivity by lowering be in charge of implementing solutions. On transport costs. Building railway lines where, Kigali is Rwanda’s main interface along the two East African trade corridors with the world and needs to fulfill its sig- holds promise for reducing freight costs nificant economic potential following market but is expensive. Developing Rwanda as demand. This effort would be accompanied a regional logistics hub offers another by a more calibrated approach toward a way to lower transport costs. Lowering complementary (and well-networked) set of regional road tolls, ensuring their uniform secondary cities and small towns. On what, application across all EAC vehicles, and reforms to strengthen land markets and applying a standard tax policy for truck- urban planning are essential to enhance the ers from all countries would lower costs efficiency of necessary capital investments further. An aggressive push for open skies in infrastructure, housing, and commercial within the EAC would help to improve air structures. Finally, on who, stronger inter- connectivity and reduce the costs of air governmental coordination of economic and cargo. spatial planning is needed to avoid coordi- 5. Increase service sector productivity. nation failures in urban development. The Backbone services (such as transport, reform agenda has the following three main telecommunications, and professional ser- elements: vices) need fewer policy barriers to compe- tition for both domestic and foreign firms 1. Unleash Kigali’s potential. Kigali’s urban and improved access to EAC and South fabric is fragmented by small-scale, patchy African Development Community profes- land development, which undermines the sionals. Services trade also offers promi- potential to achieve agglomeration econo- nent opportunities for direct exports, mies; and raises costs. Addressing this particularly in tourism, but also in mining fragmentation requires integrating labor services, education, and business services. markets through efficient, affordable, inte- grated public transport; prioritizing dense central infrastructure (particularly roads) Reform Priority 3: Leverage the to crowd in dense private investment in Urban Dividend firms and houses; and promoting connec- Urbanization, managed well, can be an tivity to global product markets. important driver of growth by generat- 2. Stre ng the n l an d m arket s . Rwanda ing agglomeration economies that enhance may want to consider moving from the productivity, spur innovation, and foster quantity-based regulation of land use to ­ economic diversification. More than one- price-based allocation. This effort requires quarter of Rwanda’s population lives in strengthening institutions so that they can urban areas, which contributed more than independently and reliably value and pub- one-third of national structural change and licly disseminate land values across uses half of national labor productivity growth and assign and protect property rights. over the past 15 years. However, urbaniza- Credible land valuations would also enable tion has driven economic growth through urban areas to fiscalize public investments xxvi FUTURE DRIVERS OF GROWTH IN RWANDA in land through land value capture. 2. Improve targeting and monitoring of Moreover, regulations on structures industrial incentives. The effectiveness should be used to mitigate negative exter- of the government’s extensive industrial nalities like environmental degradation. policy interventions could be improved 3. Foster institutional coordination. The by shifting from general support to tar- main priorities are first to unite spatial and geting successful enterprises. Crucially, economic planning, second to strengthen a performance-based approach (focused cross-district and municipal coordination, on firm productivity and exports) should and finally to boost district capacity for be mainstreamed in all interventions. urban planning and land valuation. Industrial incentives also need to be coor- dinated ­ better across government agen- cies. Incentives also could do a better job Reform Priority 4: Enable the of attracting foreign direct investment in Emergence of Competitive Domestic tradable activities. Building and rigorously Enterprises implementing a credible performance mon- Strengthening the enabling environment itoring system are critical for this effort. for both private firms and SOEs to achieve 3. Define the future role of SOEs. An assess- efficient market-led outcomes is the corner- ment of the level of competition, the com- stone of improving the four future drivers of petitiveness of SOEs versus private firms, growth—innovation, integration, agglomera- economic development goals, and social tion, and competition. Competitive firms are considerations could be used to divide essential to reap the benefits of integration key sectors into four groups: (1) sectors and agglomeration and are also at the center in which SOEs will retain a monopoly; of innovation activity. This effort calls for a (2) sectors in which SOEs will compete strong state and a strong private sector, with with private firms; (3) sectors from which complementary functions. The following are SOEs will withdraw when efforts to build the main elements of the reform agenda: up private sector capacity prove success- ful; and (4) sectors from which SOEs will 1. Address cross-cutting constraints. The withdraw immediately because the pri- first imperative is to provide affordable vate sector is already capable and there is access to finance, probably best achieved no compelling social rationale for them. through regional (rather than national) Public-private boundaries can shift as the banking institutions. Over time, capital private sector gains strength. markets and nonbank financial institu- 4. Build an effective national innovation sys- tions need to be developed (again, prefera- tem. Wide-ranging policies are needed in bly as part of regional agreements). Efforts this regard. On the demand side, a strong to reduce logistics costs are important, competitive environment would encour- as is improved access to—and reduced age firms to seek out the best available cost of—broadband connectivity, backed knowledge and strengthen managerial by effective competition in key telecom- capabilities to introduce new processes munications markets. To reduce the cost and technologies, integrate them in the and increase the reliability of electricity, production system, allocate skilled staff Rwanda needs to push forward for the to use them, and make them financially establishment of a regional energy pool, viable. Key steps to help firms to meet build capacity to procure and implement technical standards would involve a more power-purchasing agreements, strengthen effective standards board; effective, more demand forecasting, and better integrate easily available, and affordable key ser- system planning and system operations vices; greater firm awareness of the ben- functions in the utility sector. efits of following standards; and better E x ecutive S u m m ar y xxvii collaboration among firms or between 1. Strengthen research and regulatory insti- firms and knowledge providers. Stronger tutions . These institutions should be coordination, monitoring, and evaluation adapted continually to evolving opportu- of funding programs for science, technol- nities and threats. Certifications, a key ele- ogy, and innovation are also needed. The ment of Rwanda’s comparative advantage, agenda on the supply side of innovation is have to remain credible. The high techni- discussed under reform priority 1. cal expertise of the Rwanda Agriculture 5. Maximize gains from the mining sector. Board will be increasingly important as Recent discoveries of mineral deposits bode the frequency and importance of sanitary well, but they require greater efficiency and and phytosanitary issues increase. attention toward raising fiscal revenues. 2. Strengthen vertical coordination. More It is necessary to provide extensive sup- effective vertical coordination in agri- port for artisanal miners, to improve the culture requires private sector partners bargaining position of the miners, and to to provide skills, capital, and entrée into provide well-targeted extension services. international markets. Private ­ s ector Undertaking detailed geological investiga- vertical coordination arrangements tions for promising deposits and develop- and changes in horizontal coordination ing a consolidated information system are through producer groups are likely to important initial steps. Other measures grow rapidly. Government promotion include improving land management, of more standardized approaches would incorporating social impact assessments, serve the interests of both farmers and strengthening the capacity of the Rwanda aggregators. Mining Board, and developing an optimal 3. Engage the region more effectively. fiscal regime to capture an efficient and Rwanda could engage more effectively and fair share of mineral wealth. opportunistically with the EAC, the South African Development Community, and the Common Market for Eastern and Southern Reform Priority 5: Transition Agriculture Africa and bilaterally with the Democratic and Food to Be an Engine of Growth Republic of Congo on a regional division The transformation of agriculture from of labor, both in production based on com- supplying commodities for domestic use parative advantage and in knowledge gen- to producing higher-value-added goods eration and diffusion. Regional approaches through regional and global food supply could help to satisfy the demand for food chains requires continued modernization staples; improve certification of food and greater responsiveness to market signals. safety, sanitary, and phytosanitary condi- Agriculture is central to the four drivers of tions; and adopt transparent science-based growth, because it is an important source standards, product registrations, and certi- of exports and a key driver of the pace at fication of agricultural inputs. which rural resources are released for urban 4. Profit from the big-data revolution in agglomeration; the transformation itself will innovation. The benefits of big data can be built on more competition and innovation be made more accessible to smallhold- within the sector. ers. “Smart farming,” where just the right Achieving higher productivity through amounts of the right inputs are used for ­ private sector–led growth requires using each parcel on the basis of information direct public support of the private sector gathered by handheld devices with the more strategically and strengthening the pub- right sensors, offers one such opportunity. lic sector’s role as a regulator, facilitator, and Big-data approaches such as blockchain provider of public goods. The following seven technology similarly offer the potential priorities are key: for lowering the costs of small financial xxviii FUTURE DRIVERS OF GROWTH IN RWANDA transactions that require secure record endeavor where improvements are necessarily keeping and decentralized input, such as incremental. land registration and mortgages. Considerable progress in restoring trust 5. Improve targeting of public investment between the country’s leadership and citi- in infrastructure . Public spending on zens, and more broadly within the society, agriculture is low, and greater resources has been achieved from the low level fol- are needed for irrigation, especially in lowing the 1994 genocide against the Tutsi. the drier eastern regions of the country. However, further progress is essential to However, such investments are high cost maintaining stability, promoting innovation, (due to Rwanda’s hilly landscape) and and achieving rapid growth. have to be targeted on high-return prod- Key recommendations are organized ucts (for example, horticulture exports). around the three pillars of state effectiveness 6. Develop a more robust policy on high- and societal trust, all of which are essential for level human capital formation in agri- rapid growth: culture. In particular, a more consistent approach to ver tical integration is 1. Build the state’s core capabilities on the needed for training managers and tech- basis of capacity, meritocracy, coordina- nical experts working for aggregators. tion, and rule-based authority. This effort Companies might be involved in this pro- requires empowering local governments cess by instituting training programs to and civil servants, which could mean build up nationally needed skill sets in adopting more flexible imihigo (perfor- agribusiness, high-value supply chains, mance contracts) with multiyear ­ targets; and agricultural technology. improving coordination of policies on key 7. Address land degradation and the impact cross-cutting issues; expanding the train- of climate change. Although considerable ing offered by the Rwanda Management progress has been made in construct- Institute, supported by skills audits and ing robust “bench” (wide) terraces, much functional reviews to identify key gaps; more needs to be done to secure land paying higher compensation to individu- assets. Proactive promotion of adaptation als with scarce skills; and developing to climate change is also vital. Fortunately, non­fi nancial incentives to attract compe- the soil and water management interven- tencies in the civil service. tions central to halting land degrada- 2. Strengthen market economy foundations. tion support adaptation through better Strengthening corporate governance of water retention and improved soil quality. SOEs, ensuring that they are not accorded Landscape restoration and conservation an advantage over private firms, opera- require the involvement of local govern- tionalizing the Rwanda Inspectorate and ment, producer groups, and national tech- Competition Authority. Creating special nical expertise and funding. courts and fast-track procedures to adju- dicate small claims; promoting alternative means of resolving commercial disputes; Reform Priority 6: Develop boosting reliance on technology; increasing Capable and Accountable training and specialization of justice sec- Institutions of Governance tor employees, including judges, prosecu- Rapid improvements in governance, includ- tors, and investigators; and improving case ing control of corruption, rule of law, regu- management techniques would enhance the latory quality, and civil service performance, judiciary’s effectiveness in enforcing con- give Rwanda a competitive edge over its tracts. The proper enforcement of expro- peers. Even so, its ambitious aspirations priation procedures, a more efficient land are bound to test its institutions severely. management system, and full enforcement Building effective institutions is a long-term of the law on intellectual property would E x ecutive S u m m ar y xxix strengthen property rights. Further, tighter 3. Eighty-five percent of students at the end of controls on public investment allocations grade 3 were rated “below comprehension” on and prudent fiscal management to build fis- a recent reading test, and one in six students cal policy buffers are essential to developing in grade 3 could not answer a single reading comprehension question. the state’s financial capacity. 3. Strengthen accountability of the state and ensure that policies and programs References are aligned with the needs of citizens. Dihel, N., and A. G. Goswami. 2016. The Enhancing the performance of key watch- Unexplored Potential of Trade in Services dog agencies, increasing revenue-raising in Africa: From Hair Stylists and Teachers by local governments, streamlining expen- to Accountants and Doctors. Washington, diture assignments, and ensuring greater DC: World Bank. https://openknowledge​ involvement of citizens in local decision .­worldbank.org/handle/10986/24968. making (for example, in setting imihigo Hallward-Driemeier, M., and G. Nay yar. objectives), coupled with reliance on more 2017. Trouble in the Making: The Future of M a n u fa c t u r i ng - L e d D e ve l o p m e n t . qualitative information in monitoring per- Washington, DC: World Bank. formance, could make local officials more IMF (International Monetary Fund). 2018. accountable and improve the quality of World Economic Outlook: Cyclical Upswing, services. Structural Change. Washington, DC: IMF, April. Newfarmer, R., J. Page, and F. Tarp, eds. Notes Forthcoming. Industries without Smokestacks: 1. Ninety percent of cropland is on slopes of African Industrialization Revisited. Oxford, 5 percent to 55 percent. U.K.: Oxford University Press. 2. There are important gains to be had from a OECD (Organisation for Economic Co-operation demographic dividend if the decline in the fer- and Development). 2017. “The Future of Global tility rate, and thus the population growth rate, Value Chains: ‘Business as Usual’ or ‘A New could be accelerated. A recent United Nations Normal’?” Directorate for Science, Technology, Population Fund report (UNFPA 2017) found and Innovation Policy Note, OECD, Paris. that Rwanda could boost its gross domestic Solow, Robert. 1987. “We’d Better Watch Out.” product growth 1 ­ percentage point by target- New York Times Book Review, July 12, 36. ing a lower dependency ratio, which is the UNFPA (United Nations Population Fund). 2017. number of people who are under and above the “Unlocking Rwanda’s Potential to Reap the working ages of 15–64 for every 100 persons Demographic Dividend.” Policy Brief, UNFPA, within the w ­ orking-age population. New York, October. Abbreviations AfCFTA African Continental Free Trade Area ASEAN Association of Southeast Asian Nations CET common external tariff COMESA Common Market for Eastern and Southern Africa EAC East African Community FDI foreign direct investment GDP gross domestic product ICT information and communication technology NISR National Institute of Statistics of Rwanda NST1 National Strategy for Transformation ODA official development assistance PPP purchasing power parity R&D research and development SADC Southern African Development Community SOE state-owned enterprise TFP total factor productivity WIOD World Input-Output Database WITS World Integrated Trade Solution FUTURE DRIVERS OF GROWTH IN RWANDA xxxi Overview Future Drivers of Growth in Rwanda Innovation, Integration, Agglomeration, and Competition Introduction 7 percent per capita, average income would reach US$2,400 (2017 prices). To become Rapid economic growth is Rwanda’s over- an upper-middle-income country by 2035, arching development goal—a strategic choice Rwanda will need to grow at more than to anchor its long-term vision. Vision 2050 10 percent per capita. In 2035, the economic encapsulates this choice with long-term, landscape of Rwanda could resemble that of income-based goals that aim for upper-middle-­ present-day Bangladesh or, alternatively, sur- income status by 2035 and high-income sta- pass that of today’s Vietnam or even Georgia tus by 2050. With this vision, Rwanda has and Indonesia. It is not surprising, therefore, aligned itself with the successful East Asian that almost 70 percent of Rwandan respon- economies that began their development jour- dents in a recent survey mentioned high ney with a similar quest for high growth. The economic growth as their first priority for prioritization of long-term growth recognizes the country (World Values Survey, Wave 6: an important truth—sustained growth does 2010–2014; Inglehart et al. 2014). not just happen, especially in a global land- But economic growth is not only a matter scape marked by forces of technology, trade, of income. Growth matters for a broad range and tremendous competition. It requires a of other development outcomes, including combination of leadership, social cohesion, poverty reduction, as shown globally and and deep investments in core capabilities—of in Rwanda’s own experience as chronicled people, firms, and institutions—to harness the in this report.1 Sustained high growth has opportunities on offer. another, higher purpose for Rwanda: to The implications of different growth escape from its tragic past. The country is pathways are staggering. At its current pace keen to put great distance between a bright of growth (4 percent per capita), Rwanda future and a painful past. will barely cross the threshold for lower- This is not to say that economic growth middle-income status by 2035. At growth of should be the only area of policy focus. 1 2 FUTURE DRIVERS OF GROWTH IN RWANDA The challenges of inequality, public service long-term consequences. Of all the coun- delivery, and environmental sustainabil- tries in the world, only Mozambique had ity, among others, are just as important for lower per capita income in 1994, and none development and need to be looked at in had lower life expectancy at birth than parallel, as is being done in Rwanda. Rwanda. Rwanda’s income ambitions are built Facing these grim conditions, a new on a strong and widely acknowledged Government of National Unity took over record of success. Emerging from the dev- in 1994. Its task was made more difficult by astation of the 1994 genocide against the the fact that its coffers were running empty, Tutsi, which itself followed three decades infrastructure (social and physical) had been of economic stagnation, the country has decimated, trade links were broken, businesses seen its average income rise three-and- and agricultural assets had collapsed, and a-half-fold. In 1994, only Mozambique institutions of governance needed to be rebuilt. was poorer than Rwanda, which today is Insecurity and instability loomed large, both ahead of 20 countries. This rapid progress internally and from threats within the region, was made possible by the second-fastest and social trust had fallen to worrying depths. growth of gross domestic product (GDP) Even so, relief, recovery, and reconstruc- per capita on the continent, sustained over tion efforts were swift and multipronged. two decades. National reconciliation and healing evolved Past successes justify bold ambitions but through homegrown initiatives, includ- do not guarantee them. The reform agenda ing the establishment of a National Unity for accelerating growth to even higher levels and Reconciliation Commission in 1999 and then sustaining it is complex and highly and, eventually, the Gacaca courts, mod- demanding, as described in this report. eled after a traditional approach to set- tling disputes. In December 1994, the Government of National Unity issued and A Strong Start despite Initial implemented (and ­ s ubsequently closely Conditions and Emerging followed) a Declaration of Principles that outlined its political, social, and economic Concerns agenda for a “New Rwanda.” The decla- The genocide against the Tutsi in 1994 left ration emphasized social stability, national in its wake a shattered and traumatized security, and a commitment to a market nation. It was, above all, a human trag- economy, backed by a capable state and a edy, with few precedents. More than one strong private sector (World Bank 2007). ­ m illion people perished, leaving behind In the absence of a viable private sector, s uffering in indescribable forms and on ­ the state led the economic recovery through immeasurable scales. About two m ­ illion large public investments that were financed Rwandans sought refuge in neighbor- through external assistance. At the same ing countries, and at least one million time, to strengthen the foundations for were internally displaced (Chukwuma growth, a series of reforms liberalized the 2003). The economic and social costs economy, 2 promoted private investment, were enormous. The country’s GDP col- and sought to privatize some of the state- lapsed that year, falling in half from an owned enterprises (SOEs) that dominated already low base. Inflation climbed to industry. A multiphase decentralization more than 60 percent. Four out of every program was launched in 2000. five persons were living below the official These early efforts proved effective. poverty line. Life expectancy at birth fell The poverty rate had declined to 60 per- to below 30 years, and hunger and food cent by the early 2000s, on the back of a insecurity were widespread, with severe solid economic recovery. GDP had recovered OVERVIEW 3 to pre-genocide levels by 2000. And, by FIGURE O.1  Rwanda’s global rankings on Ease of Doing Business 2005, per capita income had surpassed pre-­ indicators genocide peak levels, as had many health and education indicators such as infant and child mortality, life expectancy, and pri- Registering property 2 mary school enrollment rates.3 Government Getting credit 3 revenues (excluding grants) had picked up to 14 ­percent of GDP by the mid-2000s (from Protecting minority investors 14 4 percent in 1994), which together with the Overall 29 consolidation of expenditures led to higher government and national savings. The task Paying taxes 35 of accommodating and reintegrating the influx of returning refugees had also pro- Starting a business 51 ceeded well. Resolving insolvency 58 With the dual post-genocide objectives of economic recovery and social and politi- Getting electricity 68 cal stability largely met, a strong platform was laid for long-term growth and devel- Enforcing contracts 78 opment. This agenda was picked up early Trading across borders 88 under Vision 2020 (adopted in 2000), with Dealing with far-reaching development targets that were construction permits 106 later backed by ambitious reform programs 0 20 40 60 80 100 120 implemented under a series of poverty reduc- Global ranking tion strategies. Reform efforts were most noteworthy in strengthening business regula- Source: World Bank 2019. tions, as reflected in Rwanda’s strong stand- ing on the World Bank’s Doing Business supported by robust performance in each Indicators, where Rwanda is ranked 29th of the major economic sectors. Industry in the world (figure O.1)—above all other (propelled by construction) and services low-income countries and second only to (driven by information and communication Mauritius on the continent (World Bank technology [ICT] and trade and transport) 2019). Decentralization was deepened fur- each has grown at an annual rate between ther, aimed at strengthening quality and 9 and 10 percent since 2006, and agricul- accountability in service delivery. Large-scale ture (led by crops and livestock) has grown public investments continued to close the at 5.4 percent. infrastructure gaps, particularly in energy, Broad-based sectoral growth facilitated telecommunications, and road transport. rapid structural transformation, meaning the Trade integration was also accelerated with movement of labor out of low-­ productivity Rwanda’s accession to the East African agriculture and into industry and services Community (EAC) in 2009, which signifi- and from farms to cities. Close to two-thirds cantly brought down tariffs—from an aver- of GDP growth since 2000 has been on age of 16.5 to 11 percent. account of structural transformation, with Economic and social achievements in the rest coming from growth within sectors. the post-recovery phase (2006 onward) The percentage of the population in urban have continued to be impressive. Growth areas increased from 16 percent in 2002 to of GDP per capita has averaged 5 percent 27 p­ ercent in 2015, and the urban popula- a year since 2006, second only to Ethiopia tion more than doubled (from 1.5 ­ million to on the continent (figure O.2). GDP growth, million). Because the agriculture sector had 3.5 ­ for the most part, has been broad based, such low labor productivity at the beginning 4 FUTURE DRIVERS OF GROWTH IN RWANDA FIGURE O.2  Average growth of GDP per capita in of the process, the transformation brought Rwanda and select countries, 2006–16 significant gains. With close to 70 percent of agriculture—the sector the labor force still in ­ China even now with the lowest labor productivity Ethiopia figure O.3)—­ (­ significant potential remains India for realizing continued gains from structural Cambodia Bangladesh transformation, which is still in its early stages RWANDA Vietnam Sudan in Rwanda. mauritius Indonesia Ghana Rwanda has also seen impressive improve- ments in social indicators, including gender mozambique equality (table O.1). On many of the health Philippines Poland indicators, Rwanda is now closer to the aver- age of lower-middle-income countries, well Zambia Turkey ahead of its low-income peers. Maternal Tanzania and child mortality rates have fallen Colombia 80–90 ­ percent, and life expectancy at birth Uganda malaysia has more than doubled (to 69 years) in the Thailand korea, Rep. past 20 years or so. Basic ­ i nfrastructure— Congo, Dem. Rep. from roads to telecommunications and Namibia Botswana energy supply— has improved solidly. Chile kenya A nationwide rollout of health care, includ- Singapore Nigeria ing health insurance coverage for more than malawi Egypt, Arab Rep. 80 percent of the population, is also impres- Russian Federation sive. Rwanda has surpassed several financial inclusion targets, with almost 90 percent of Pakistan the adult population having some access to Niger financial institutions. Crucially, the institu- Togo ­ overnance have been strengthened tions of g Cameroon significantly, earning the government a repu- Brazil tation for efficiency and probity (Ggombe Senegal and Newfarmer 2017). In some areas, progress has been less South Africa satisfactory. Some of the more visible gaps mexico are in educational outcomes. Rwanda’s cur- Grenada rent levels of human capital and its current trajectory of investment in human capi- tal are not consistent with its ambitions. Ukraine In some areas—for example, stunting and primary and lower-secondary school com- Chad pletion rates—Rwanda lags behind the aver- age of low-income countries (figure O.4). Burundi madagascar Achieving rapid economic growth and job creation will require a large increase in the Jordan quality of human capital. A second area of policy concern is the yemen, Rep. low savings rate. The domestic savings rate –6 –4 –2 0 2 4 6 8 10 is less than 10 percent, well short of the Percent investment rate of 26 percent and behind that of many of Rwanda’s regional peers Sources: World Development Indicators data (World Bank, various years); National Institute of Statistics of Rwanda data. (figure O.5). The domestic savings rate, OVERVIEW 5 which tends to move with income levels, FIGURE O.3  Sectoral labor productivity and annual change in has remained virtually unchanged since the share of employment in Rwanda, 2000–16 mid-2000s, despite a 70 percent increase in per capita income (figure O.6).4 The gap 2.5 Financial GDP per worker from economywide GDP per worker) Sectoral labor productivity (log deviation in sectoral services and has been made up by external assistance real estate and, increasingly, by inflows of foreign 2.0 direct investment (FDI). To meet its growth Administrative and support objectives, Rwanda will need to raise its 1.5 Utilities services Manufacturing domestic s­ avings rate to at least 30 percent 1.0 Mining and quarrying and to attract more FDI in tradable sec- Hotels and restaurants tors. 5 The high-growth East Asian econo- Culture and other services 0.5 Human health and social work mies, whose record Rwanda would like to surpass, had savings rates that were at least Transport services 0 double Rwanda’s at similar income levels. Determining the causes of Rwanda’s low Agriculture Construction Wholesale and –0.5 retail trade savings rate and identifying specific reform options require more ­ i n-depth analysis. –1.0 Further, continued reliance on external –2.0 –1.5 –1.0 –0.5 0 0.5 assistance, in any case, carries risks. As Average annual change in employment share a share of GDP, this assistance has been (percentage points), 2000–16 declining since 2004, and, as Rwanda Source: Derived from Diao, Randriamamonjy, and Thurlow 2017. approaches middle-income status, it can Note: The bubble sizes indicate the share of total employment in 2016. be expected to continue declining. Even if Rwanda can fill the gap through inflows A third challenge is low productivity. of private capital, the associated macro- Despite high GDP growth, Rwanda lags economic challenges are substantial if the other countries on labor productivity (out- gap continues to be large for an extended put per worker) (figure O.7). Rwanda’s per- period. formance on this measure is explained to a TABLE O.1  Social and economic indicators in Rwanda compared with low- and middle-income-country averages, 1994 and 2015 Rwanda Low- and Initial Low-income- middle-income- condition Latest country country average Indicator (1994)a (2015)a average (2015)a (2015)a % of population below national poverty line 80 < 40 (2014) n.a. n.a. Gini indexb 0.49 (2000) 0.50 (2014) n.a. n.a. Immunization, measles (% of children ages 12–23 months) 76 (1996) 96 76 80 Improved sanitation facilities (% of population with access) 39 62 28 52 Improved water source (% of population with access) 62 76 66 90 Births attended by skilled health staff (% of total) 27 (2000) 91 49 (2012) 59 (2012) Maternal mortality ratio (modeled estimate, per 100,000 live births) 1,270 290 496 254 Mortality rate, under-five (per 1,000 live births) 284 41 76 53 Life expectancy at birth, total (years) 31 69 64 70 Secondary school enrollment (%, gross) 9 (1999) 37 n.a. n.a. Literacy rate, adult females (% of females ages 15 and above) 49 (1991) 68 49 (2010) 66 (2010) Literacy rate, adult males (% of males ages 15 and above) 68 (1991) 75 66 (2010) 80 (2010) Sources: World Development Indicators data (World Bank, various years); National Institute of Statistics of Rwanda data. Note: n.a. = not applicable. a. Unless specified otherwise. b. The Gini index is a measure of income inequality. Zero represents perfect equality, and 1 represents the most extreme inequality. 6 FUTURE DRIVERS OF GROWTH IN RWANDA FIGURE O.4  Human capital outcomes in Rwanda FIGURE O.6  Rwanda’s domestic savings and and other countries, by income level, 2015 investment rates, 1995–2015 30 Stunting rate 20 Primary % of GDP completion rate 10 Lower-secondary 0 completion rate –10 0 20 40 60 80 100 Percent 95 97 99 01 03 05 07 09 11 13 15 19 19 19 20 20 20 20 20 20 20 20 Rwanda Low income Net ODA received Net FDI in ows middle income High income Domestic investment rate Gross domestic savings rate Source: World Development Indicators data (World Bank, various Sources: Calculations based on data from World Development years). Indicators (World Bank, various years) and National Institute of Statistics of Rwanda data. Note: FDI = foreign direct investment; ODA = official development assistance. FIGURE O.5  Average gross domestic savings rate FIGURE O.7  Labor productivity and GDP per for Rwanda and regional comparators, 2014–16 capita in Rwanda and other countries 100 25 90 Labor productivity (2010 US$, PPP) 80 20 70 60 50 Savings rate 15 40 30 10 20 10 5 0 400 4,000 40,000 GDP per capita (2010 US$, PPP) 0 All countries Rwanda Ethiopia Tanzania Uganda Kenya Rwanda Source: Calculations based on Penn World Tables 9.0 data (Feenstra, Inklaar, and Timmer 2015). Sources: Calculations based on data from World Development Note: PPP = purchasing power parity. Indicators (World Bank, various years) and National Institute of Statistics of Rwanda data. OVERVIEW 7 large extent by weak total factor productivity FIGURE O.8  Total factor productivity (TFP) and GDP per capita in (TFP) (­ figure O.8). TFP growth has fallen to Rwanda and other countries just 1 percent since 2008. Although resources have moved broadly from agriculture to 1.5 other sectors with higher labor productivity, 1.3 the allocative efficiency within sectors has been suboptimal in Rwanda. Within-sector 1.1 TFP (United States = 1) labor productivity either fell or rose only 0.9 slightly across most sectors from 2001 to 2016 (­ figure O.9). 0.7 Fourth, the private sector still maintains 0.5 a relatively limited presence, has shown low capacity for innovation, and lacks the scale 0.3 economies that are crucial for productiv- 0.1 ity. In large part, this reflects the historical legacy, whereby the formal private sector was –0.1 400 4,000 40,000 decimated after the genocide. Rwanda has GDP per capita (2011 US$, PPP) since been successful in streamlining business All countries Rwanda Log of all countries regulations, as seen, for example, in its high ratings on the Doing Business Indicators. But Source: Calculations based on Penn World Tables 9.0 data (Feenstra, Inklaar, and Timmer 2015). the work is by no means over. A key issue is Note: PPP = purchasing power parity. that costs faced by businesses are higher in Rwanda than in economies at similar stages of their development. For example, the high- FIGURE O.9  Average growth of labor productivity in Rwanda, growth East Asian economies had Rwanda’s by sector, 2001–16 cost levels only after they had crossed the upper-middle-income-country threshold Agriculture (­f igure O.10). 6 The high costs of energy, Transportation services finance, and trade logistics have been impor- Health and social services tant contributing factors. Private investors Hotels and restaurants will also look for stronger economic returns, Wholesale and retail trade for which a pickup in productivity growth mining and quarrying would be essential. Fifth, in the midst of high growth and Culture and other services rapid structural transformation, the per- Financial services and real estate formance of the manufacturing sector has Administrative and support services been subpar. Growing at a pace just short Utilities of the overall economy, the sector’s share manufacturing of total value added has dropped to just Construction 6 ­ percent—2 percentage points lower than at –3 –2 –1 0 1 2 3 4 5 the turn of the century. Only 4 percent of the Average growth rate in labor force is in manufacturing (two-thirds output per worker (%) in agro-processing), and even that share has been declining (World Bank 2015b). Source: Calculations based on Diao, Randriamamonjy, and Thurlow 2017. As a result, Rwanda has fallen behind in ­ g enerating manufacturing value addition (at about 20 percent) for a small economy (­figure O.11). seeking high growth. Goods exports have Finally, Rwanda’s outward orientation has edged up only slightly (from 4.8 percent of not kept pace with its economic objectives. GDP in 2005 to 8.4 percent in 2015), and The ratio of exports to GDP remains low much of the increase was accounted for by 8 FUTURE DRIVERS OF GROWTH IN RWANDA FIGURE O.10  Price levels and GDP per capita in Rwanda and (largely unprocessed) commodities such as comparator countries and economies, 2011 coffee, tea, and reexported minerals. Value addition from manufactured exports has 0.9 not made a major contribution to early- stage growth, even though the export base 0.8 has become more diversified. Export of ser- vices (dominated by tourism) has risen at an Index (level of U.S. GDP in 2011 = 1) 0.7 uneven pace, with their share of GDP rising 0.6 sharply from 2002 to 2007 and falling there- 0.5 after, finally settling in at about 6 ­percent. FDI in export-oriented activity also has been 0.4 relatively low, again despite Rwanda’s very strong performance on the Doing Business 0.3 Indicators and efforts to attract FDI. 0.2 0.1 Future Aspirations 0 Building on its strong record, Rwanda’s 500 5,000 50,000 f ut u re aspi rat ions a re a mbit ious , as GDP per capita (2011 prices, PPP) reflected in the country’s Vision 2020 and Vietnam Rwanda China Vision 2050 currently under preparation. India korea, Rep. Taiwan, China These documents, products of extensive national consultations, are being opera- Source: Calculations based on Penn World Tables 9.0 data (Feenstra, Inklaar, and tionalized by a series of economic devel- Timmer 2015). Note: PPP = purchasing power parity. opment and poverty reduction strategies and seven-year government programs. For 2018 to 2024, they are being combined into a single process, the National Strategy for Transformation. FIGURE O.11  Manufacturing value added in the East African Community, 2006–16 Vision 2020 set the country on an ambi- tious course. Achieving middle-income 15 status and reducing the poverty rate to 20 percent by 2020 were among its key 14 objectives. The vision identified six pillars to manufacturing value added (% GDP) 13 achieve its goals: (1) human resource devel- 12 opment and a knowledge-based economy, (2) regional and international economic 11 integration, (3) infrastructure development, 10 (4) a ­private sector–led economy, (5) produc- 9 tive and m ­ arket-oriented agriculture, and (6) good governance and a capable state. 8 Gender equality, environmental sustain- 7 ability, and long-term commitment to sci- 6 ence and technology were the cross-cutting themes to support the six pillars. 5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Vision 2050 aspires to take Rwanda to upper-middle-income-country status by kenya Sub-Saharan Africa Uganda Burundi Tanzania Rwanda 2035 and high-income status by 2050, with the intention of providing productive eco- Source: World Development Indicators data (World Bank, various years). nomic opportunities and higher-quality OVERVIEW 9 living standards to all Rwandan citizens FIGURE O.12  Projected GDP per capita for Rwanda under alternate (Government of Rwanda 2017). These aspi- growth scenarios, 2016–50 rations translate into double-digit average annual growth rates (more than 10 percent 14,000 in per capita terms), requiring Rwanda to 12,000 High-income cuto ($12,476) grow faster than China or the Republic of Korea at similar stages of their development 10,000 f igure O.12). If growth falls even slightly (­ US$, 2016 prices short of this, Rwanda’s upper-middle- 8,000 income-­ country ambitions would be pushed back by at least a decade. The aspirational 6,000 growth scenario has major underlying Upper-middle-income cuto ($4,035) 4,000 requirements, as described in box O.1. To achieve these ambitions, Vision 2050 2,000 adopts four broad priorities, which also Rwanda’s GDP per capita in 2016 underpin the design, policies, and actions 0 of the National Strategy for Transformation: 20 6 20 8 20 0 20 2 20 4 20 6 20 8 20 0 20 2 20 4 20 6 20 8 20 0 20 2 20 4 20 6 20 8 50 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 20 Rwanda, aspirational India 1. Higher quality of life and standard of China Thailand living. To move beyond meeting basic Korea, Rep. Botswana needs to ensuring a higher standard of liv- Taiwan, China ing for all people, Rwanda will focus on Sources: Calculations based on World Development Indicator data (World Bank, various (1) access to affordable high-quality edu- years); Penn World Tables 9.0 data (Feenstra, Inklaar, and Timmer 2015) cation and health care; (2) modern hous- Note: Alternate GDP per capita trajectories if Rwanda were to grow at the pace of other countries from a similar income level as Rwanda in 2016. ing and settlements with environmentally friendly and climate-resilient surround- ings; (3) comprehensive adequate social 4. Positive contributions to international security and safety nets; (4) universal peace and prosperity. Rwanda will forge access to daily amenities; and (5) compre- its own place in the world in the context hensive personal security and safety. of regional integration, multilateral and 2. Transformation for prosperity (develop- bilateral cooperation, freedom from aid ment of high-value and competitive jobs dependency, pan-Africanism, and South- and sectors). To improve productivity South cooperation. and competitiveness, Rwanda will tar- get diversified tourism, manufacturing These objectives will be underpinned by driven by competitive local industries, strong and sustainable macroeconomic fun- business and financial services, informa- damentals, effective institutions, and positive tion technology, logistics and aviation, Rwandan values. The values underpinning agroprocessing, science and technology economic and social progress are self-reliance innovation, construction, and extrac- and self-determination, dignity, unity and tive industries. All of these efforts will be Rwandan identity, integrity, equity (including underpinned by high-quality services in gender and youth), transparency and open- public and private sectors. ness, participation in the global community, 3. Development of modern infrastructure good governance and accountability, com- and productive livelihoods. This effort munity participation, local innovation, and would involve modernization with smart national stability. green cities, towns, and rural settlements; Centered on the Rwandan people, Vision well-designed transport facilities and 2050 considers Rwandans as the country’s services; and efficient public and private main resource, reflects the society’s core val- services. ues, recognizes a strong collaborative role 10 FUTURE DRIVERS OF GROWTH IN RWANDA BOX O.1  Major requirements of Rwanda’s income aspirations The aspirational income targets of Vision 2050 quality of education and worker skills. A much require substantial increases in savings and invest- stronger external orientation also would be nec- ment, as illustrated in the aspirational high-growth essary, with the ratio of exports to GDP more scenario summarized in table BO.1.1. The sce- than doubling to well over 40 percent by 2035. nario assumes that gross domestic product (GDP) The aspirational high-growth scenario would growth rises to 12.5 percent a year (10.2 percent further require significantly higher labor produc- in per capita terms) by 2022 and stabilizes at that tivity growth—aggregate and within each of the level for the foreseeable future (the slightly lower major sectors. The demands on industry would GDP growth rate in table BO.1.1 reflects slower be especially strong, with labor productivity in the growth from now until 2022). As a result, GDP sector having to switch from a declining trend in per capita rises to just over US$4,000 in 2035 and the past decade to solid 6 percent annual growth to more than US$12,000 in 2050, which is the in the coming period. Labor productivity growth in threshold currently used to determine high-income agriculture and services also would have to accel- status. The investment rate would have to rise to erate significantly. Even with strong within-sector about 40 percent, in a context of declining foreign improvements, almost 70 ­ p ercent of the overall assistance. The slack would have to be picked up growth of labor productivity in the next couple of by increased private investment, because public decades would be generated by structural transfor- investment is already at the limits set by financing mation, reflecting massive movement of labor out of options. Further, the savings rate would need to agriculture and into industry (mining, construction, increase four- to fivefold (from 8 percent in 2016) in manufacturing, utilities) and services. the next two decades to finance these much higher The requirements of less ambitious income levels of investment. growth trajectories (by matching, for example, the Total factor productivity growth also would growth rate of China or the Republic of Korea or need to accelerate rapidly (tables BO.1.2, BO.1.3, the slightly lower growth rate of Botswana, India, and BO.1.4)—to about 6 percent a year—and to or Vietnam at a similar stage) would be slightly less account for two-thirds of future growth. Another onerous, but not by much. Rwanda would require crucial requirement is greater human capital, significantly higher savings and private investment calling for strong improvements in the level and rates and productivity growth. TABLE BO.1.1  Aspirational high-growth scenario for Rwanda: Demand-side requirements, 2000–35 Share of GDP (%) Average annual growth (%) Indicator 2016 2025 2035 2000–16 2016–35 Gross domestic investment 28 39 40 12.9 13.6 Public 12 10 8 n.a. n.a. Private 16 29 32 n.a. n.a. Domestic consumption 92 77 62 7.3 9.2 Gross domestic savings 8 23 38 n.a. 21.0 External transfers (net) 4 3 2 n.a. 6.9 Gross national savings 12 26 40 n.a. 18.6 Exports of goods and services 17 27 46 12.4 17.7 Imports of goods and services 37 43 48 10.8 13.1 Trade balance −20 −16 −2 n.a. n.a. Current account balance −16 −13 0 n.a. n.a. Sources: Estimates based on World Development Indicators data (World Bank, various years); National Institute of Statistics of Rwanda data. Note: n.a. = not applicable. (Box continues next page) OVERVIEW 11 BOX O.1  (continued) TABLE BO.1.2  Aspirational high-growth scenario for Rwanda: Productivity requirements Average annual growth (%) Indicator 2000–14 1999–2008 2009–16 2015–35 2017–35 Labor productivity 5.3 — — 8.1 — Agriculture 3.1 — — 5.0 — Industry −2.8 — — 6.1 — Services 3.2 — — 6.1 — Total factor productivity — 4.3 1.1 — 6.0 Sources: Estimates based on World Development Indicators data (World Bank, various years); National Institute of Statistics of Rwanda data. Note: — = use of different time periods for labor productivity growth and total factor productivity growth. TABLE BO.1.3  Aspirational high-growth scenario for Rwanda: Sectoral share of employment, 2000–35 Share of total employment (%) Average annual growth (%) Indicator 2015 2025 2035 2000–14 2015–35 Total employment 100 100 100 2.5 2.8 Agriculture 66 49 36 0.6 −0.2 Industry 9 16 27 14.6 8.6 Services 24 36 37 9.4 4.8 Source: Estimates based on National Institute of Statistics of Rwanda data. Note: The assumed decline in average growth in agriculture from 2000–14 to 2015–35, despite higher labor productivity growth in the sector, in part reflects the massive movement of labor to other sectors. TABLE BO.1.4  Aspirational high-growth scenario for Rwanda: Sectoral share of GDP, 2000–35 Share of total GDP (%) Average annual growth (%) Indicator 2015 2025 2035 2000–14 2015–35 Total GDP 100 100 100 8.0 10.1 Agriculture 30 16 9 5.4 3.8 Industry 19 27 38 10.0 14.1 Services 51 57 53 9.6 10.1 Source: Estimates based on National Institute of Statistics of Rwanda data. Note: The assumed decline in average growth in agriculture from 2000–14 to 2015–35, despite higher labor productivity growth in the sector, in part reflects the massive movement of labor to other sectors. for both the state and the private sector, and is envisioned as the innovation, telecommu- signals an outward reach to make up for the nications, financial, and logistics hub for small domestic market and to access criti- East Africa. cal knowledge and ideas. Strong connective Rwanda in 2050 will be a vastly altered infrastructure and a focus on efficient urban place—an innovative, knowledge-based, and development are viewed as being crucial for globally integrated economy with a highly future growth. The vision further envisages a creative population and world-class enter- dynamic knowledge-based economy, with the prises. Not only will it be substantially richer, service sector playing a leading role: Rwanda but also its people will be universally endowed 12 FUTURE DRIVERS OF GROWTH IN RWANDA with much higher levels of human capital, middle-­i ncome countries. The innovations and its cities, hosting more than 60 percent are affecting what is produced, how it gets of the country’s population, will be brim- produced, and where it is produced—not just ming with economic vitality and serving as for advanced goods but also for more tradi- continental centers of specialized knowledge. tional manufactured goods. High levels of societal trust will be the glue New technologies associated with indus- holding the country firmly together. Rwanda try 4.0 —or the fourth industrial revolu- also will have comfortably transitioned to tion, including industrial automation and becoming an open economy (akin to today’s advanced robotics, digitalization and integra- Singapore)—with cross-­ border trade, con- tion of Internet-based systems (the Internet of nective infrastructure, investment flows, Things), and additive manufacturing (three- and people-to-people exchanges marking dimensional printing)—are part of a larger close economic ties across the continent and trend of automation and data exchange in beyond. Drawing on the vitality of its cities economic activity. For example, consumer and the highly developed capabilities of its goods are increasingly embedded with elec- people, Rwanda will transition to becoming a tronics, software, sensors, and network con- continental hub for higher-end services, hav- nectivity to enable these objects to connect ing maximized the industrial opportunities and exchange data, which is changing manu- along the way. The institutions of governance facturing. The service sector, traditionally a will evolve into even higher forms of capa- nontradable sector, is becoming a major part bility and accountability, with the country of the global trade story. ranked alongside high-income nations on key Technology and the information revolu- measures of governance. tion are also enabling disruptive innovations in business models. Apple is an early (and highly successful) example, with its disrup- Opportunities and Risks tion of a wide range of industries, including Global Megatrends personal computers, music, movies, media, and telecommunications. Other prominent Global megatrends of technological innova- examples include digital platform com- tions, shifting patterns of production, and panies like Airbnb and Uber, which have changing sources of cross-border investments f undamentally altered the hospitality and ­ have major implications for economic activ- taxi industries, respectively. Increased auto- ity in Rwanda and elsewhere. Global climate mation is further affecting production loca- change is another major trend, with significant tions, enabling, for example, some leading downside risks for all countries, but especially firms, albeit still in small measure, to return for those in the low- and middle-income world labor-intensive manufacturing back to high- that are reliant on agriculture and have lim- income economies and closer to consumers. ited resources to mitigate the impact. Rwanda Their disruptive nature notwithstand- can shape the net benefits of these forces in its ing, technological innovations, for the most favor with early and decisive action to develop part, bring upside opportunities for low- and the capabilities of its workers, firms, and pub- middle-income countries. There is evidence lic institutions, the right investment decisions, that more widespread use of scale-neutral and more effective business regulations. digital technologies, such as ICT, allows firms in emerging economies to access wider Technology Megatrends markets by cutting entry costs and by reduc- Global technological and business innova- ing the impact of distance.7 For example, tions, powered by the information revo- scale is expected to matter less with addi- lution, are increasingly disrupting the tive manufacturing technologies, such as patterns of production and trade across the three-dimensional printing. Combined with world, with major implications for low- and the demand for customized, fast-delivered OVERVIEW 13 goods, widespread use of digital technolo- Consequently, cheap labor as a source of gies could lead to geographically dispersed competitive advantage is increasingly giving production, potentially helping small econo- way to a more demanding ecosystem. It is mies like Rwanda to overcome some of their still not a zero-one choice for global produc- scale and locational constraints.8 ICT in the ers, which remain open to producing in both Internet of Things space, such as big data high-income and low- and middle-income and cloud computing, can similarly reduce countries. But their requirements are getting the impact of distance on firms’ competitive- more stringent with regard to infrastructure, ness. This, too, is positive news for Rwanda, available skills, logistics, other backbone given its landlocked geography and distance services, regulations, supplier base, and intel- from markets. The Rwandan government lectual property rights. There is also growing aims to capitalize on this emerging trend demand for low- and middle-income-country by continuing to invest in network connec- firms to adopt new technologies to remain tivity and sensor deployment in different competitive, but to do so they need to have applications. greater capacity to use the new technolo- In services, the information revolution has gies, raising the bar further in terms of the allowed low- and middle-income countries to mentioned prerequisites. go beyond traditional export sectors such as An early mover in some areas, Rwanda tourism and transport to more modern ones may be well placed to take advantage of these such as health care and business. These new trends. The cell phone revolution, for example, export products can be exported electroni- has lessened the need for landline connectivity, cally (taking distance out of the equation), reducing the potential cost of investing in such can achieve scale economies, and are an effec- legacy technologies.9 Similarly, drones can tive channel for technology diffusion. The potentially reduce the need for air t ­ ransport– spread of productivity-enhancing characteris- related infrastructure. The much-cited tics in services expands the range of activities example of Zipline, which uses unmanned available as pathways for development. drones to make 50–150 daily deliveries of Modern technological innovations also critical medical supplies to various locations pose major threats. To the extent that they are across Rwanda, is perhaps just the begin- labor efficient and skills intensive, the concern ning. Furthermore, commercial drone services is that they will narrow the paths for low- could transport items other than emergency and middle-income countries to benefit from supplies.10 The impact is already being felt in manufacturing. Some observers have raised agriculture. e-Soko—an electronic platform the specter of premature deindustrialization that gives farmers, consumers, and traders (Rodrik 2015). The implication is not just up-to-date market price information by short that machines will displace unskilled labor, message service—is widely used in Rwanda, but also that production will be retained in enabling farmers to market their agricultural higher-income economies. In addition to produce better and to get premium prices. reshoring of manufacturing activity from ICT-enabled modern services could enable low- and middle-income countries back to Rwanda to leapfrog—at least in part—the high-income countries, there is also a concern stage of manufacturing-led development in that the expected migration of labor-intensive the conventional process of structural change. activities from China to poorer economies Business process outsourcing services, for with lower labor costs might not happen or example, can be developed without a manu- might happen only in select locations that facturing core, with the potential to become a form part of China’s regional value chains. major export area. To derive the most benefits, Technological innovations also threaten to Rwanda will have to build its human capital exacerbate inequality, both within and across rapidly, enable the emergence of vibrant and countries, as countries in a position to lever- competitive domestic enterprises, and invest age technology gain higher incomes. further in building resilient market institutions. 14 FUTURE DRIVERS OF GROWTH IN RWANDA BOX O.2  The importance of regional value chains for growth and outward orientation in East Asia Light manufacturing has long been seen as a cata- into full package production. Some were eventually lyst for economic development. It is labor intensive, able to develop and commercialize brands of their is capital parsimonious, and offers viable develop- own (Gereffi 1999; Gereffi and Memedovic 2003). ment pathways for low- and middle-income coun- In the process, they offshored lower-value-adding tries. Various economies in East Asia, including activities to other countries in the region, which the Republic of Korea and Taiwan, China, began eventually upgraded into higher-value-adding func- their engagement with buyer-driven value chains in tions themselves, sending their previously held com- apparel and footwear, among others, by importing petencies elsewhere (Akamatsu 1962). The shift intermediate goods and assembling them into final of manufacturing activity from coastal China to products, often in export-processing zones. Over Vietnam is the latest step in this “flying geese” pat- time, firms in these countries were able to upgrade tern of industrial development. FIGURE O.13  Measures of global vertical integration in Rwanda, development (box O.2). These trends have 1995–2014 brought tremendous benefits to participating countries, seen in their growing heft in the 120 world economy: the share of low- and middle- income G-20 countries11 in world GDP rose 110 from 11 percent in 1990 to 28 ­ percent in 2016. China’s share alone increased from less than 100 2 percent to 15 percent, as its share of global manufacturing rose from less than 5 percent Percent 90 in 1990 to 10 percent in 2016. The world economy is now experienc- 80 ing structural shifts that could dramatically change the outlook for global value chains in 70 the coming years (OECD 2017). On the one hand, global value chains are maturing and 60 losing momentum because the “unbundling of production” has largely already happened, 19 5 19 6 19 7 19 8 20 9 20 0 20 1 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 1 20 2 20 3 14 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 19 as seen in the flattening of the share of foreign Foreign value added, share of exports per gross exports (WIOD 2013) value added in gross exports of goods and Foreign value added, share of exports per gross exports services since the onset of the 2008 global (WIOD 2016) financial crisis (figure O.13). On the other manufacturing import content, share of manufacturing hand, new forces are reorienting produc- exports per gross exports (WIOD, WITS) tion within global value chains. Production costs have risen significantly in some low- Source: Hallward-Driemeier and Nayyar 2017. Note: WIOD = World Input-Output Database; WITS = World Integrated Trade Solution. and middle-income economies, eroding their competitiveness in labor-intensive manufac- Regional Value Chains turing activities and driving the transition Fragmentation of production into global from labor- to capital-intensive industries.12 value chains has created a critical oppor- Digitalization of production is also shaping tunity for countries to develop through global value chains by reorienting global pro- export-led ­ manufacturing. In East Asia, for duction and trade closer to demand.13 example, several countries have leveraged Production is becoming increasingly con- these opportunities to achieve export-led rapid centrated in regional and local hubs closer OVERVIEW 15 to end markets. This concentration has and exports and services trade. These oppor- implications for manufacturing-led growth tunities apply in particular to agribusiness and in Africa, where cross-border production food processing, subsectors in which Rwanda networks have yet to materialize because of currently has a revealed comparative advan- weak regional integration. Enormous oppor- tage (Hallward-Driemeier and Nayyar 2017). tunities for cross-border trade in food prod- These activities employ unskilled workers and ucts, basic manufactured goods, and services have relatively low intensity of physical capital therefore remain unexploited because of high and research and development. The products transport costs, nontariff barriers, and regu- typically are traded regionally (rather than latory constraints (Brenton and Isik 2012). internationally) because they are bulky to Enhanced regional integration is important transport (for example, wood products, bev- to derive the benefits on offer. The conti- erages) or require proximity to raw materials nent also will need to keep a close eye on the (for example, food production). The region rapid technological innovations and changing also offers major opportunities for trade in sources of FDI (discussed next). services, which already forms more than half T h e g r o w i n g r e g i o n a l i z a t i o n - i n -­ of Rwanda’s export earnings. There is sig- production trend can work in Rwanda’s nificant potential to boost services exports favor. The region around it abounds in further, while benefitting from the greater (largely untapped) opportunities (box O.3). competition, lower prices, and improved qual- Moreover, the ability of Rwandan firms to ity that come with services imports. compete globally depends on the “competi- tiveness” and “connectedness” of its neigh- Changing Sources of Outward FDI bors. Rwanda is therefore likely to seize The sources of FDI are changing, a trend that regional trade opportunities through intra- is likely to continue (figure O.14). In response regional trade and participation in regional to higher labor costs, labor-­ i ntensive man- value chains connected to the global market. ufacturing is moving out of China, and The strongest regional opportunities for with it new opportunities are emerging for Rwanda exist in commodity-based processing other low- and middle-income countries. BOX O.3  Opportunities in the region around Rwanda The regional economic blocks around Rwanda of Rwanda). Revived as a free trade area in 2000 abound in opportunities for trade, investment, and (following dissolution of a previous arrangement in transfer of ideas. They also offer scale economies 1977) and upgraded to a customs union in 2005, and specialization in production, which would be the community aims to create a common currency hard for Rwanda to achieve by relying solely on its and aspires to establish itself as a full political fed- own small, landlocked economy. eration. EAC members have duty-free preferential The most significant regional opportunity arises access to the United States through the African from Rwanda’s membership in the East African Growth and Opportunity Act and to the European Community (EAC), an ambitious platform for eco- Union through Everything But Arms. nomic, political, social, technological, and security The EAC Customs Union entails three key aspects: cooperation for six Great Lakes countries: Burundi, duty-free trade within the EAC; common external Kenya, Rwanda, South Sudan, Tanzania, and tariffs (CETs) on imports from a third country; a Uganda. The combined population of the EAC is and common customs procedures. The securities 170 million (about 15 times that of Rwanda), and exchanges of four countries (minus Burundi, which its combined gross domestic product (GDP) in 2016 does not have one) are members of the East African was US$163 billion (about 18 times larger than that Securities Exchanges Association. Other areas of (Box continues next page) 16 FUTURE DRIVERS OF GROWTH IN RWANDA BOX O.3  (continued) cooperation include a regional power pool, transport Free Trade Area (AfCFTA). COMESA, a free trade links, and trade facilitation. EAC-wide competition area with Rwanda as one of its members, has 40 times policy and law are in place. Rwanda’s population and 80 times its GDP. The Despite this good progress, several impedi- AfCFTA, an even bigger opportunity, is a pan-African ments prevent more meaningful economic integra- push to promote and harmonize trade liberalization tion. First, free trade is hampered by a long list of across the continent’s subregions. Once operational, duty exemptions and significant nontariff barriers. it will be one of the world’s largest free trade areas, Second, lack of policy harmonization holds back potentially involving 55 nations (only 44 have signed cross-border infrastructure development (Dihel, the agreement thus far) with a combined popula- Fernandes, and Mattoo 2012). Third, although tion of more than 1.2 billion and GDP of more member countries have committed themselves to than US$2 trillion (UNCTAD 2018). The United developing harmonized and complementary trade Nations Economic Commission for Africa estimates and transport policies, these commitments gen- that intra-African trade could increase more than erally remain on paper only.b Fourth, the region 50 percent under the AfCFTA if import duties were is still some way from enabling free cross-border eliminated, and more than 100 percent if nontariff mobility of labor and capital. Issues such as perma- barriers were also reduced (UNECA 2018). nent residency and the right of access to, and use Finally, there is significant untapped market of, land remain subject to national policies rather potential to the west in the Democratic Republic of than being part of the common market protocol. Congo. While conflict in the Democratic Republic Fifth, EAC member states still have to harmonize of Congo limited trade prior to 2007, exports have customs procedures in practice. Moreover, customs increased considerably in the last decade. By 2016, revenues are not pooled.c Finally, regional institu- Rwanda exported more goods to the Democratic tions are weak, and enforcement mechanisms are Republic of Congo than to the EAC. The main especially so. exports include livestock and crops, but there also Further opportunities lie in the Common Market is significant (informal) cross-border trade in ser- for Eastern and Southern Africa (COMESA) and vices such as finance, transportation, and wholesale the expected opening of the African Continental trading. a. Currently, there are three CET rates: 0 percent for raw materials, 10 percent for intermediate goods, and 25 percent for finished goods. b. For example, regulations on vehicle dimensions, axle-load limits, road transit charges, and highway codes have yet to be harmonized. Even common definitions of road classes and route numbers are missing. Similarly, rail connectivity is impeded by minimal integration of national technical standards, such as those for building and maintaining railway facilities. Shipping on inland waterways and lakes would benefit from common regulations on ship registration as well as safety standards, including those on periodic ship surveys, staffing requirements, and aids to navigation and radio communication (World Bank 2015a). c. Customs operations, including revenue collection, are managed by national authorities, creating delays and increasing transaction costs. FDI outflows from East Asia rose 7 percent 2000, as has the stock of Chinese FDI in in 2016 to US$363 billion, mainly because the continent. In 2015, 4 of the top 10 FDI of new outflows from China. On the back investors in Africa were Asian economies, of surging cross-border mergers and acqui- led by China.15 Notably, greenfield FDI sitions by Chinese firms, China has become into Africa is coming largely from low- and the second-largest Asian investor, after Japan ­ i ncome economies, whose compa- m iddle-​ (UNCTAD 2017). nies are also participating through mergers Investment abroad by Chinese firms tar- and acquisitions and purchases of assets held gets a wide range of manufacturing and ser- by high-income-country ­ m ultinationals. vices industries,14 with increasing attention In 2016, almost 80 p ­ ercent (US$73.6 billion to Africa as a destination. African countries of US$94.1 billion) of announced green- still account for a small share of net global field FDI projects in Africa were from low- FDI inflows (2.4 ­ p ercent in 2015), but the and middle-income countries, nearly half continent’s share has almost tripled since of it (US$36.1 ­ billion) from China alone OVERVIEW 17 (UNCTAD 2017). However, these projects FIGURE O.14  Share of global net outflows of foreign direct are mostly in real estate, natural gas, infra- investment, by region, 1994–2016 structure, renewable energy, chemicals, and automotive; FDI in manufacturing is still 90 relatively rare in Africa. 80 The top FDI investors in Rwanda are 70 already low- and middle-income nations. Faced with declining foreign assistance, 60 Rwanda surely needs more FDI to address 50 Percent its massive investment needs. However, it 40 also needs to make sure that FDI is targeted 30 increasingly to the tradable sector to support the massive export drive needed for high 20 growth. The regional trade agreements are 10 likely to enhance Rwanda’s (and the rest of 0 the continent’s) attractiveness to FDI, as they –10 promote a unified market structure and inte- 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 grated production networks. Europe and Central Asia Middle East and North Africa East Asia and Pacific Sub-Saharan Africa Global Climate Change Latin America and the Caribbean South Asia Climate change is potentially the most con- sequential global issue. Greenhouse gas emis- Source: World Development Indicators data (World Bank, various years). Note: Net outflows of investment from the reporting economy to the rest of the world. sions are on path to cause a 3.5°C to 4.0°C warmer planet by the end of the century. Climatic conditions, heat, and other weather Me d iu m - t er m cl i m at e proje c t ion s extremes considered highly unusual or for Rwanda indicate further increases in unprecedented today could become the new ­ temperature—between 1°C and 2.5°C—by normal. The impact of global climate change the middle of this century. Rainfall projec- is already being felt, with the number of cat- tions, though less certain, suggest increased egory 4 and 5 storms having risen sharply year-to-year variability in rainfall. The agri- over the past 35 years. The Arctic Ocean’s culture and livestock sectors will likely be ice has shrunk to its lowest area on record, affected. Rwanda will need to plan for these and global sea levels have risen about 10–20 vulnerabilities and seek to manage them with centimeters in the past century, increasing the climate adaptation policies and investments. risk of storm surges and fluctuations in pre- cipitation (World Bank 2016). Domestic Opportunities and Challenges The threat to Rwanda’s economy from climate change is already being felt. The aver- ­ Population Dynamics and the Promise of a age temperature in Rwanda has increased at Demographic Dividend a higher rate than the global average. Its rain- Rwanda’s population has grown about fall patterns are becoming more irregular and 2.5 percent a year since 1960, a pace that unpredictable, with shorter rainy seasons, has been sustained since 2000. This is a which has had a major impact on food pro- brisk but not exceptional pace in compari- duction. Rwandan agriculture is mostly rain- son with the rest of the low- and middle- fed (less than 10 p­ ercent of cultivable land is income world: 54 nations have seen a faster irrigated), which is why crop production is increase in population since 1960 (44 since highly vulnerable to c ­ limate- and weather- 2000). As a result of demographic shifts, related risks. These risks are compounded by influenced by relatively high but declining high levels of soil erosion and periodic floods fertility rates and sharp reductions in child and landslides. mortality, today’s Rwanda is a youthful 18 FUTURE DRIVERS OF GROWTH IN RWANDA nation, with a median age of just 19 years: growth remains high, Rwanda can expect a 40 percent of the population is under the age rapid decline in the poverty rate and a con- of 15, and almost 70 percent is under the age comitant rise in the share of its middle-class of 30 (UNFPA 2017). population. With 7.5 percent growth of Rwanda has the potential to harness its GDP per capita and with income distribu- demographic dividend. Yet risks associated tion assumed to remain unchanged, Rwanda with population increase are heightened by would virtually eliminate extreme poverty Rwanda’s high population density (the high- (those spending less than US$1.90 purchas- est in mainland Africa) and rising pressures ing power parity a day) somewhere between on its limited natural resources and the envi- 2035 and 2040 and more than halve the ronment. In addition, the fertility rate, one of share of the moderate poor (those spending the main drivers of population growth, has between US$1.90 and US$3.20 purchasing declined only gradually on average—from power ­ parity a day) from the 21 ­ percent rate an average of 5.6 births per woman in 2000 observed in 2014 (figure O.15). At the same to 4.2 births per woman in 2015, includ- time, more than 70 percent of its population ing a brief rise and fall during that period. would be middle class or higher (­ persons cat- At the current pace, Rwanda’s population, egorized as emerging consumers and global 11 ­m illion in 2016, is projected at least to middle class). Even if per capita growth comes double by 2050, which would more than dou- in at about 5.5 percent a year (still quite high ble the density of population to close to 1,000 by global standards), half of Rwanda’s popu- people per square kilometer of land area. lation would be middle class by 2040. Important gains from a demographic div- These projected shifts are likely to be rep- idend are possible if the decline in the fertil- licated at the regional level and will have ity rate—and thus in the population growth profound implications for the population’s rate—could be accelerated. Rwanda could purchasing power, preferences, aspirations, boost its GDP growth 1 percentage point and expectations of government. The thrust by targeting a lower dependency ratio—the of Rwanda’s growth strategy would still need number of people who are under and above to be oriented outward, producing tradable the working ages of 15–64 years for every goods and services to meet regional and 100 persons of working age—in parallel global demand rather than internal demand. with improved schooling (UNFPA 2017).16 This orientation is the only way for Rwanda Rwanda’s dependency ratio is relatively to overcome the constraints of being a small high at 75 percent. The United Nations economy and reach the scale economies and Population Fund estimates that the depen- specialization necessary for high growth. But dency ratio could fall to anywhere between rising consumer incomes will generate strong 53 and 64 percent by 2050, depending on demand for nontradable products, which will the pace of the decline in fertility. High- create an important secondary opportunity growth countries in East Asia bottomed out for local businesses. at dependency ratios of about 40 ­ p ercent, so perhaps there is scope to accelerate Strong Potential for Structural Rwanda’s progress. Policy options include Transformation better-targeted family planning measures With close to 70 percent of the labor force and continued emphasis on female educa- still in agriculture, which has much lower tion, health, and economic empowerment labor productivity than the major subsectors (UNFPA 2017). within industry and services ( ­figure O.16), a significant potential remains for realizing fur- Emerging Middle Class ther gains from structural ­transformation— High growth sustained over an extended the process by which labor and other period can profoundly affect the income resources shift from one economic sector to characteristics of the population. If GDP another. By this report’s estimate, more than OVERVIEW 19 FIGURE O.15  Growth scenarios for Rwanda and share of the population, by consumption category, by 2040 a. Aspirational high-growth scenario (7.5% per capita growth) b. High-growth scenario (5.5% per capita growth) Share of population, by consumption category (%) Share of population, by consumption category (%) 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 14 16 18 20 22 24 26 28 30 32 34 36 38 40 14 16 18 20 22 24 26 28 30 32 34 36 38 40 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Global middle class (> US$15.00 PPP/day) moderate poor (US$1.90–US$3.20 PPP/day) Emerging consumer (US$5.51–US$15.00 PPP/day) Extreme poor (< US$1.90 PPP/day) Near poor (US$3.21–US$5.50 PPP/day) Source: Calculations based on National Institute of Statistics of Rwanda data. Note: PPP = purchasing power parity. 70 percent of Rwanda’s GDP growth in the FIGURE O.16  Labor productivity gaps in Rwanda, by sector, 2014 next two decades is likely to be accounted for by structural transformation, even under 1,000 970 a high-growth scenario. But gains from 900 structural transformation cannot be taken Sectoral productivity as a share 800 of average productivity (%) for granted. Only strong labor productivity 714 700 growth within sectors can assure continued 600 gains from structural transformation. For 500 that assurance, policies to boost competi- tiveness within sectors, as discussed in this 400 300 295 report, and well-functioning factor markets 250 251 180 207 (for land, labor, and capital) are essential. 200 141 100 43 0 Main Elements of Rwanda’s re n s m p ng m tio on s g es es e ce io rin ltu vic iti vic an ns Hu ica tati i Growth Strategy ct ur co Tra min tu til u er er tru so un or ric U ac rs ls re ns uf Ag cia he m ns Co an Ot an As noted, aspirations have been set extremely m Fin high, targeting an upper-middle-income d an Rwanda by 2035 and a high-income econ- Sources: Estimates based on World Development Indicators data (World Bank, various omy by 2050. These aspirations translate years); National Institute of Statistics of Rwanda data. ­ ouble-digit average annual growth rates into d (more than 10 percent in per capita terms)— future investment and savings rates, human targets that will require Rwanda to grow faster capital development, export orientation, than any country (China and Korea included) technological innovation, and other forms of has in the past. The ­requirements—regarding productivity improvements—are demanding. 20 FUTURE DRIVERS OF GROWTH IN RWANDA Essential ingredients for s ­ uccess are strong For scale and specialization, Rwanda will leadership, social cohesion, and deep invest- need to make the most of external oppor- ments in core capabilities—of people, firms, tunities and enhance the benefits of urban and i ­nstitutions—to harness the global and agglomeration. To succeed in these areas, technology-related opportunities that are on Rwanda needs to have a competitive domes- offer. tic enterprise sector, both public and pri- The reform agenda is complex and highly vate, with a strong potential to do well in demanding: nothing short of an extraordinary competitive environments. Such enterprises effort will suffice, given the level of Rwanda’s themselves have three critical requirements: ambition. The hard work begins in class- a strong ecosystem for technological innova- rooms. The country needs a massive effort tion, world-class human capital, and robust focusing on human capital ­ development—its institutions of governance. This chain of pri- own education-focused Marshall Plan—if it orities forms Rwanda’s high-growth strategy. is to achieve its income ambitions. With all of Rwanda’s strategy for high grow th its achievements, Rwanda still lags the aver- thus has four essential and interdependent age of low-income countries in crucial aspects d rivers—innovation, integration, agglom- ­ of human capital—for example, in stunting eration, and competition (figure O.17). and in primary and lower-secondary school These future drivers of growth, in turn, completion. An important related issue is the would receive the necessary boost from high stunting in early years, with implications reforms in six high-­priority areas: (1) human for children’s future learning abilities and par- capital development; (2) export dynamism ticipation in the knowledge and services-led and regional integration; (3) well-managed economy that Rwanda envisages. urbanization; (4) competitive domestic The next requirement is to achieve higher enterprises; (5) agricultural modernization; investment rates. Rwanda already has a and (6) capable and accountable public insti- r elatively high investment rate of about ­ tutions. The six reform areas are discussed 26 percent. But double-digit growth rates in more detail in the report. would require investment to be significantly higher still—at least 35–40 percent—in an environment of declining external assistance. FIGURE O.17  Future drivers of Rwanda’s growth: Achieving this level of investment will require Innovation, integration, agglomeration, and competition a sharp increase in investment by the private sector, because public investment is already at the limit set by the available financing options; Highly a more than fourfold rise in the domestic sav- developed ings rate; and even higher FDI. human A higher-order challenge is to boost pro- capital Trade and Competitive ductivity growth, which also has a bearing regional domestic on Rwanda’s ability to raise the investment integration enterprises and savings rates. High productivity growth, DRIVERS OF GROWTH in turn, will require scale economies and eco- Innovation nomic specialization in areas of Rwanda’s Integration Agglomeration comparative advantage, with competition Modern Competition Well- and technology diffusion as essential comple- agriculture/ managed ments. Scale economies and economic spe- food sector urbanization cialization have proved essential for sustained Capable and high growth across the world (Commission accountable on Growth and Development 2008), but it is institutions even more important for a small, landlocked country like Rwanda. OVERVIEW 21 Doing well on each of these six neces- out (box O.4). The more challenging part is sary reform areas is what separated the to go beyond the necessary to the sufficient high-growth East Asian economies from conditions. Rwanda will be pushed to take countries that achieved rapid grow th high-risk strategic bets to gain high returns. for a decade or two, only to see it fizzle T hese efforts must be calibrated and BOX O.4  An international comparison of Rwanda’s long-term growth trajectory Only a handful of economies in East Asia have FIGURE BO.4.1  GDP per capita in Rwanda and select achieved an income trajectory even approaching the countries and economies one Rwanda aspires to achieve. A comparison with 35 GDP per capita (thousands of US$, 2010 PPP) those economies, therefore, can shed useful light on the fundamental areas that need to be at the center 30 of Rwanda’s policy focus. Rwanda’s long-term growth trajectory stacks 25 up well against the early growth records of global 20 economies that sustained rapid growth over several decades. Figure BO.4.1 compares Rwanda against 15 two Asian Tiger economies plus Brazil, China, Morocco, and Thailand. The figure is striking on 10 two counts. First, the long-term acceleration of growth in each of these economies started at similar 5 per capita income levels—between US$1,000 and 0 US$1,600 (in 2010 U.S. dollar purchasing power Base +2 +6 +10 +14 +18 +22 +26 +30 +34 +38 +42 +46 +50 parity). Second, by 2016, Rwanda (roughly a decade year into its postrecovery growth acceleration) had kept Number of years beyond base year pace with comparators (including China) at a simi- Thailand korea, Rep. lar stage. Rwanda morocco What happens from here on seems critical on Rwanda China (4% per capita growth) the basis of international comparisons. About a Brazil Rwanda decade into their respective growth accelerations— (7.8% per capita growth) Taiwan, China Rwanda’s current stage—successful economies Sources: Calculations based on Penn World Tables 9.0 data (Feenstra, such as China, the Republic of Korea, and Taiwan, Inklaar, and Timmer 2015); National Institute of Statistics of Rwanda data. China, started to pull ahead of the rest. They were Note: The base year is the year prior to the one in which long-term growth began to accelerate in each economy. It is 1951 for Taiwan, able in years 10–50 either to maintain or to surpass China, and Brazil; 1958 for Thailand; 1959 for Morocco; 1962 for the their growth records of the first 10 years. However, Republic of Korea; 1977 for China; and 2005 for Rwanda. The base year economies such as Brazil, Morocco, and Thailand for Rwanda is 2005 because that is when GDP per capita recovered to the pre-genocide peak levels. PPP = purchasing power parity. saw their growth plunge early in the latter period. The challenge for Rwanda is to follow the trajec- tory of the former group and to avoid that of the lat- critical period, the successful economies focused ter group. Doing so will mean raising its growth of on a core set of fundamentals. Common elements gross domestic p percent ­ roduct per capita to the 7–8 ­ included high rates of savings and investment; range. However, if recent-year growth rates of about strong agricultural productivity; early and sustained 4 percent per capita continue, then even after three emphasis on human capital; strong outward orien- decades or so, Rwanda could not expect to get past tation; robust urban agglomeration; a competitive where Brazil or Thailand is today. domestic enterprise sector; and strong, stable, and Rwanda therefore is at a seemingly important adaptable institutions of governance. Those condi- juncture. Decisions in the next 5–10 years will mat- tions are necessary for Rwanda to achieve its long- ter for meeting its long-term aspirations. In this term growth aspirations. 22 FUTURE DRIVERS OF GROWTH IN RWANDA managed carefully. Policy responses need on water and air pollution from early on, to first to address key cross-cutting constraints protect the quality of natural resources (air, (such as skills, finance, infrastructure, and land, water), to build climate resilience into business regulation), clarify the future role economic planning and infrastructure invest- of SOEs, and then selectively target areas for ments, and to meet international commit- direct support that are closely aligned with ments on cutting greenhouse gas emissions. Rwanda’s comparative advantages. Any The high-growth strategy thus enunci- such direct support will have to set clear ated, with emphasis on economic special- policy objectives and performance targets ization, scale economies, and trade, leaves for beneficiary firms, be coordinated closely open the question of food security at the across government entities, and include a national level. Rwanda will need to work rigorous system to monitor progress, enforce closely with its regional partners to ensure sanctions, and provide incentives to reward an uninterrupted flow of food staples—for success and punish failure—a model that example, through the provision of financial Korea followed closely in its early years of guarantees under a regional process. If the development. country decides to maintain self-sufficiency Any future growth strategy is unlikely in any particular staple, then it should do to succeed if it leads to further widening of so after a careful analysis of the full eco- income disparities or does not provide equality nomic implications of such a move. For of opportunity for all citizens. Growth accel- example, Japan and Korea still produce erations can widen inequalities in the initial their own rice and beef, but at significant stages as returns on skill levels rise and urban economic costs, which they fully recognize agglomeration leads to spatial concentration and willingly accept. of economic activity. Rwanda will need to be Finally, the reform agenda and invest- keenly mindful of its future trends. Building ment programs underlying the high growth a strong system of social protection to pro- strategy will be financially and institution- vide basic safety nets to the most vulnerable ally demanding. Given the limited fiscal and expanding access to quality public ser- space available and expected continued vices (education, health care, and basic infra- decline of external concessional financ- structure such as sanitation, potable water, ing, future interventions will require far electricity, and road and telecommunications greater involvement of the private sector, connectivity, for example) to give everyone a together with efforts to enhance access fair chance to enjoy the fruits of growth will to domestic and external capital markets be important efforts in this regard. A stronger and to strengthen the planning and imple- emphasis on educating girls and empowering mentation capabilities of the government. women can be especially fruitful in breaking The latter involves better prioritization the initial cycle of poverty and expanding the and greater efficiency of public spending, country’s base of human capital. increased flow of government revenues, and The growth strategy also will have to stronger and more transparent public finan- protect the environment: economic growth, cial management systems. Strong emphasis however fast-paced it may be, at the cost of on macroeconomic and social stability will the environment is not sustainable. Low- and remain essential to these efforts, even as middle-income countries often make the mis- Rwanda navigates a more uncertain global take of neglecting these aspects in the early economic and political landscape. stages of development, only to find the cost of reversing them later to be much higher—both Six Reform Areas of Importance financially and in terms of lost growth poten- tial. It is not necessary to adopt high-income- for Rwanda country environmental standards from the This section discusses in more detail the six beginning. But it is necessary to put a price reform areas of importance for Rwanda. OVERVIEW 23 Human Capital and Innovation is insufficient given the country’s ambi- tious aspirations. Moreover, investments Introduction in human capital, particularly efforts to Rwanda’s aspirations to reach upper-­ reduce stunting and improve basic educa- middle-income status by 2035 require tion, contribute to growth only after con- dramatic improvements in human capital. siderable time (the beneficiaries have to Economies that have grown rapidly over grow up). Only a small fraction of the pop- an extended period have made substantial ulation enters the labor force each year, so investments in the education and health even dramatic improvements in education of their citizens. Human capital includes will adjust the skills of the overall work- the knowledge and skills of the popula- force only slowly. The sooner Rwanda tion, and it results from investments in increases its human capital investments, education and health. Ultimately, human the sooner it will be on track to achieve capital investment and economic growth more rapid growth. form a virtuous cycle: greater human devel- opment increases economic growth, and Challenges and Opportunities greater economic growth finances further Human capital efforts are urgent for human development. Cross-country analy- Rwanda on a wide range of interventions, sis demonstrates that countries that invest including prevention of stunting, improve- in human capital early in the cycle enjoy ment of access to and quality of basic edu- the benefits of this virtuous cycle, whereas cation, increase in enrollment in higher countries that experience high initial eco- education, and building of innovation nomic growth without investing in human capacity. capital almost always fall into a vicious Despite the launch of several success- cycle of low human capital followed by a ful initiatives, stunting still represents a slowdown of economic growth (Ranis, major challenge in Rwanda. At last mea- Stewart, and Ramirez 2000). sure, 36.5 percent of children suffered from A broad set of policies is needed to support stunting. Furthermore, the elasticity of human capital formation. Building human stunting with respect to economic growth capital entails a wide array of interventions in Rwanda is less than half the elasticity in across the life cycle, starting with invest- the rest of the world, so future economic ments in early childhood, including prenatal growth cannot be counted on to eliminate and early child nutrition and cognitive stim- it. Stunting has significant short- and long- ulation, and continuing with high-quality term impacts on Rwanda’s human capital basic education, higher education oppor- and—ultimately—on economic growth. tunities, and skills that individuals gain as Adults who were stunted in childhood have adults, both through on-the-job training and poorer health and shorter height, are at risk through adult education. Interventions also of suffering noncommunicable diseases, include health investments beyond early child and have lower cognitive ability and fewer nutrition, from vaccinations for children to socioemotional skills. These effects trans- preventive and curative health care for chil- late into reduced productivity, lower wages, dren and adults. Finally, a strong economy and slower economic growth. By one esti- invests in innovation to continue creating mate, the per capita income of today’s new opportunities. workforce would be 10 percent higher if R e c o g n i z i ng t he c ou nt r y ’s s t rong adult Rwandans had not been stunted as future ambitions, progress on human children. These impacts spill over to the capital needs to be dramatic and swift. next generation, with stunted women more Under the current rate of improvement, likely to have babies who are underweight Rwanda will still have low-income-coun- and who have cognitive challenges (Galasso try rates of human capital in 2035, which et al. 2016). 24 FUTURE DRIVERS OF GROWTH IN RWANDA Rwanda faces the same two challenges completion and making improvements in in basic education as many other coun- quality difficult. tries: access and quality. Virtually all The concern about the quality of educa- ­ children in Rwanda begin primary school, tion is just as serious as the concern about but only about two-thirds of them com- access. If students are failing to learn, then plete it. One reason is out-of-pocket costs. economic growth will not follow from Another is high opportunity costs, which investments in education. Yet 85 percent are accounted for in part by high repetition of Rwandan students at the end of grade rates in the early grades. Nearly one-quarter 3 were rated “below comprehension” on a of first-grade students are made to repeat recent reading test, and one in six students that grade (USAID 2017). Repetition— in grade 3 could not answer a single read- along with other factors, such as limited ing comprehension question (EDC 2017). early childhood education coverage and late In addition, youth who are approaching the school ­starters—results in a large “bulge” job market also need better opportunities for of students in P1 (first grade) (figure O.18), skills training to help them to transition to lowering the likelihood of primary school employment. FIGURE O.18  Early-grade “bulge index” in Rwanda and select countries 3 Cabo Verde São Tomé and Príncipe 2 mauritius Côte d'Ivoire mali Tanzania Burkina Faso 1 Guinea South Africa Ghana Niger Senegal Gambia, The Zimbabwe Swaziland 0 Namibia Botswana Early-grade "bulge index" Comoros Equatorial Guinea Congo, Rep. –1 Lesotho Central African Republic Cameroon Congo, Dem. Rep. –2 Angola Benin Chad Togo Sierra Leone Ethiopia –3 Burundi Guinea-Bissau Uganda –4 madagascar –5 Rwanda –6 Source: Bashir et al. 2018. Note: Low values in Rwanda reflect high enrollment in P1 (first grade) relative to the age group, low progression to P2 (second grade) (that is, many repeaters), and low preprimary coverage. OVERVIEW 25 Rwandan teachers attend and put forth FIGURE O.19  Projected share of Rwanda’s workforce with tertiary significant effort, yet this effort is under- education under two growth scenarios, 2010–50 mined by skills and pedagogy. Crucially, many teachers have limited command of the a. General education trend scenario (business as usual) language of instruction: a recent assessment 100 found that less than half of teachers are at the 80 “intermediate level” in English. A lack of pro- ficiency in the language of instruction inevi- 60 Percent tably affects student performance not only in English reading, writing, and speaking ability 40 but also in all other subjects that are taught in 20 English, including math, science, and social studies. The government has invested exten- 0 sively in teacher language training, but more 2010 2015 2020 2025 2030 2035 2040 2045 2050 intensive efforts are needed to bring teachers b. Fast-track scenario (at the pace of the the rest of the way to fluency in the language Republic of korea and Singapore) of instruction. 100 Currently, relatively few Rwandans com- plete tertiary education, although enrollment 80 rates are rising rapidly. The latest numbers 60 Percent (2015) suggest that just 8 percent of tertiary- age youth are enrolled in tertiary education, 40 well below the level in middle-income coun- tries. Furthermore, even with rising tertiary 20 enrollments—and those enrollments have 0 doubled in the last 10 years—shifting the 2010 2015 2020 2025 2030 2035 2040 2045 2050 proportion of the population with tertiary No education Some or all secondary education in the workforce takes significant Some or all primary Some or all tertiary time, because only a small proportion of the workforce changes with each graduating Source: Construction based on data from Lutz, Butz, and KC 2014. Note: Panel a is based on the current rate of growth of enrollment in Rwanda. Panel b is cohort (figure O.19). Moreover, relatively few based on the rate of growth of enrollment in the Republic of Korea and Singapore. graduates are specializing in key job creation fields, such as science and engineering. Just Recommendations 6 ­percent of university students in Rwanda Rwanda faces an array of needs with regard are enrolled in engineering, manufactur- to human capital investment and needs to ing, and construction; and only 9 ­ p ercent expand investment at all levels of human capi- are studying sciences. If Rwanda intends tal formation. Each human capital investment to grow its manufacturing and technology builds on previous ones. Therefore, invest- sectors, then the number of students in sci- ments yielding returns that are realized more ences and engineering clearly also needs to quickly need to be balanced with investments grow. Even though historically Rwanda has in younger generations. For example, the invested more in higher education than other returns from investments in tertiary education countries in the region, public financing of and skills training are realized most imme- higher education has declined recently, even diately. However, their continued expansion as demand for higher education continues to is dependent on an increased flow of well-­ grow. Financing for innovation in Rwanda educated individuals from earlier levels, and also remains very low, most recently esti- their returns are complemented by a popula- mated at 0.4 percent of GDP (Lemarchand tion with broad literacy and numeracy. and Tash 2015), which is a tenth of the share Government should consider two prin- in countries like Korea and Singapore. ciples in setting investment priorities to 26 FUTURE DRIVERS OF GROWTH IN RWANDA maximize the impact on growth. First, it been demonstrated to increase parent and stu- is necessary to identify the “binding con- dent investment in education and to improve straints”: Which problems are so severe that, the quality of education. unless they are solved first, no amount of money or time spent solving the less severe Improve the Quality of Education.  Improving problems will help? Second, it is necessary the quality of teachers is essential. Teachers in to identify the investment required in activi- Rwanda generally attend school and teach, ties that yield economic growth both now which is itself a great challenge in many coun- and later. Complementary investments, such tries. But primary school teachers need to be as safety nets, can help households to make trained in improved pedagogies so that chil- investments that will contribute to inclusive dren in the first three years get a firm grasp on growth. literacy before transitioning to English. There A holistic approach is needed, with special is good evidence on effective programs to teach emphasis on the following areas. literacy in the early years, including partially scripted lessons and ongoing coaching of teach- Drastically Lower the High Rates of ers. Because these improvements take time, Stunting.  Reducing Rwanda’s stunting rate transitioning to English later (for example, requires multiple coordinated interventions, at the end of primary) may also be valuable. and incentives are key. Currently, many pro- Many teachers in the upper grades of primary grams to address these incentives in Rwanda and in secondary have a limited grasp of the suffer from limited coverage and inconsis- language of instruction: a recent assessment tent financing from a patchwork of donors. showed that only 43 percent of teachers have A big push is needed to improve food secu- the “intermediate level” in English. Rwanda rity and nutritional practices and to increase could consider leveraging its major investment access to clean water and good sanitation. in laptops in schools to provide teachers with Careful monitoring systems are required to regular opportunities to improve their English. evaluate which policies deliver the greatest Technology could also be applied to increase gains. The good news is that high rates of students’ learning performance.17 Rwanda also stunting are not inevitable. Many countries could consider recruiting English-speaking (including Peru and Senegal) have made dra- expatriates to remedy the immediate shortage matic gains, with political will, civil soci- of teachers and, for the longer run, to train a ety cooperation, media campaigns, robust core group of high-quality Rwandan teachers. monitoring, adequate resources, and a multi- pronged approach seen as key to their success. Strengthen the Provision of Technical and Vocational Training. Collection and Expand Access to Basic Education. In dissemination of information on the quality Rwanda, expanding access first means reduc- of skills providers and the returns to differ- ing costs and improving perceived benefits. ent skills would encourage youth to partici- Countries that have achieved widespread pate in sectors with high returns and help basic literacy have offered free primary to improve the quality of skills training pro- education. Achieving universal primary edu- grams. Many high-growth countries, includ- cation requires ensuring that children are not ing Korea, Malaysia, and Singapore, used an turned away for failure to pay incidental fees, activist approach to skills development by which may require increasing the per student setting a strategic direction, tone, and culture benefit paid to schools and reducing repetition for efforts to improve workforce skills; creat- in early grades so that children do not become ing an organizational infrastructure with the too old for their grade. It is also important to appropriate governance design; and ­ fostering provide information on the financial returns efficient and effective management of service to schooling because such information has delivery by providers. OVERVIEW 27 Develop a Quality Tertiary Education the amount of resources devoted to educa- System Focused on High-Return tion over time. Activities.  Rwanda has taken dramatic steps to improve the quality of tertiary edu- Provide Better Information on Out- cation in recent years, consolidating public comes.  Rwanda is an innovator in holding ser- universities into the University of Rwanda vice providers accountable, with performance for better governance. Increasing access to contracts for educators and health workers, financing, including loosening restrictions along with innovations in p ­ erformance-based on private financing, would help to expand pay (Basinga et al. 2011; Zeitlin et al. 2017). enrollment. Rwanda also needs to focus its In many countries, service provision has tertiary education system on key areas of improved because of the effective involve- investment: more science and engineering. ment of parents, pointing to the importance Strategies used in high-income countries to of dissemination of information on learn- encourage university students to enter high- ing outcomes and other elements of school return fields—including financing incentives performance. More regular measurement of (as in Argentina and Australia) and improv- learning outcomes and stunting reduction ing the quality of science and engineering would allow the government to evaluate the instruction in earlier grades (as in Norway effectiveness of different interventions and to and Poland)—could be considered. accelerate progress on both aims. Foster Innovation.  The tertiary education Transformation through Trade: Using sector is an ideal space to foster innovation in Exports and Regional Integration to Rwanda. Publications and patents in Rwanda Drive Future Growth have been rising, although from a very low base. Likewise, Rwanda has invested in a Introduction range of graduate and postgraduate centers To achieve its aspiration of becoming a high- for technical training, including Carnegie income country by 2050, Rwanda needs Mellon University and the various centers of to accelerate the growth of trade. Inflows excellence. Creating incentives for researchers of development assistance have financed to develop and adapt innovations that benefit a large share of investment and powered industries in Rwanda can help Rwanda to reap GDP growth in the past two decades, but the maximum returns to local innovation. they are likely to attenuate in the coming A practical way to do this follows the model two decades as Rwanda progresses toward common in high-income countries, where pri- middle-income status. Trade will become vate firms finance university research to solve an increasingly important driver of growth. production challenges. Given the nascent pri- Exports will provide foreign exchange to vate sector, the government will have to con- purchase ­much-needed investment in equip- tinue to play a supporting role. ment, ­ t echnology goods, intermedi- h igh-­ ate components, and product varieties and Allocate More Resources to Human Capital will foster productivity by allowing firms to Development.  The amount that success- exploit increasingly large economies of scale. ful countries spend on health and education Increased import capacity will facilitate varies, and financing is far from the only fac- access to high-­ technology goods and foster tor in successful human capital investment. competition that drives productivity. Trade Governance of the sectors arguably matters expansion also implies the need to attract far more and is a strength in Rwanda. It is FDI, because multinational companies bring impossible to imagine achieving universal ­ anagerial, technical, and design skills in m primary education and a significant increase while their networks facilitate access to new in secondary education without expanding export markets (Freund and Moran 2017). 28 FUTURE DRIVERS OF GROWTH IN RWANDA FIGURE O.20  Exports as a share of GDP and log GDP per capita in markets and to propel structural transfor- Rwanda, 2000–16 mation and growth (Hallward-Driemeier and Nayyar 2017). 125 Challenges and Opportunities Exports of goods and services (% of GDP) 100 On the basis of a comparison with countries experiencing high rates of economic growth, Rwanda’s exports as a share of GDP have to 75 increase significantly for Rwanda to achieve its income objectives for 2050. A review of global 50 Rwanda, 2007 Rwanda, 2016 experience shows a large spread of exports- Rwanda, 2000 to-GDP ratios as countries achieve upper- middle-income status, but that ratio tends to 25 Upper-middle-income countries be upward of 40 percent (figure O.20). Since 2000, Rwanda has consistently increased its 0 share of exports in national income, but the 4 6 8 10 12 share is still far below the average for upper- Log GDP per capita middle-income countries. Rwanda needs to have double-digit year-on-year export growth Source: Calculations based on Comtrade data (United Nations, various years). every year up to 2035 if it is to cross the 40 percent threshold. Meeting such a target is difficult but not impossible, given that the Trade expansion is central to creat- share of exports in national income is still low ing new, higher-productivity jobs that relative to that of other countries with com- faci l it ate g row t h t h roug h st r uc t u ra l parable levels of per capita income. Therefore, transformation. Moving labor from low- significant export opportunities are avail- productivity jobs mainly in agriculture able to Rwanda, and exports still have ample to higher-productivity jobs in a range of room to grow. mostly urban activities is imperative for Rwanda has begun laying the foundations growth. East Asia made this transition to for an export push. Over the last decade, high growth by relying on labor-intensive exports have grown about 20 percent annu- manufacturing for export. Rwanda, as ally, and the export portfolio has become with much of Africa, requires not only more diversified, with the share of coffee, labor-intensive manufacturing but also tea, and minerals falling from 41 percent in agribusiness, horticulture, and selected 2005 to 25 percent in 2015. New activities, services—what some have called “indus- particularly services exports, have surged in tries without smokestacks” (Newfarmer, importance. Tourism alone now accounts for Page, and Tarp, for thcom ing). T hese 23 percent of export earnings, and services activities, taken together, hold the prom- account for about half. New exports of goods ise of doing for Rwanda what manufactur- are also becoming important, especially ing did for East Asia in the 1990s. They exports to regional markets. In 2014, the are labor intensive and tradable, and they EAC accounted for 41 percent of manufac- have high value added per worker. As in turing exports, 66 percent of leather goods, traditional manufacturing, technologi- and 53 percent of horticultural products cal change is rapid and can spawn rapid sold abroad. Non-EAC neighboring mar- productivity growth. In a world of recent kets have also become important. Exports technological revolutions in ICT, manufac- to the Democratic Republic of Congo have turing techniques, and global value chains, increased considerably in the last decade: Rwanda has an opportunity to leverage by 2016, Rwanda exported more goods to greater integration into regional and global the Democratic Republic of Congo than to OVERVIEW 29 the EAC.18 Rwanda has also attracted more FIGURE O.21  Intra-bloc goods imports as a share of GDP before FDI of late, which is contributing to export and after joining the bloc performance. That said, Rwanda still exports below 18 the average of other countries at its per 16 15.8 capita income. Whereas exports in agro- 14 13.2 processing have been dynamic, exports in other manufacturing areas have been disap- 12 Share of GDP (%) pointing, declining from 8 percent of total 10 8.7 exports (2012–14) to 5 percent in 2016. 8 This decline is largely due to reductions 6.5 in some of the higher-skill export prod- 6 5.1 ucts such as machinery, mechanical appli- 4 3.0 ances, and electrical equipment. Further, 2.2 2.0 2.1 2 Rwanda’s exports remain concentrated in a 0 small number of firms. Over 2009–16, the EAC SADC ASEAN top 1 percent of exporters accounted for 2 years before 5 years after 10 years after more than 40 percent of the total value of exports (while the top 5 percent accounted Source: Shepherd, de Melo, and Sen 2017. for 80 percent). Exporter survival rates are Note: EAC = East African Community; SADC = Southern African Development Community; ASEAN = Association of Southeast Asian Nations. also low. Export performance continues to suffer from low labor productivity in key backbone services such as transport and getting goods to market and getting inputs ICT and low levels of private investment in to local producers. Rwanda is a land- tradable sectors. locked country, which means that trans- An important challenge is that the ben- port costs typically add some 50 ­ p ercent to efits to trade from regional integration in the cost of exporting products and import- the EAC have been limited so far. By remov- ing inputs. Because more than 90 percent ing internal tariff and nontariff barriers, of goods exports are transported by truck, regional integration is expected to result in Rwanda relies heavily on the land trans- trade creation. Yet a comparison of intra- port corridors of other countries for access regional imports as a share of GDP before to the sea. Almost all of its trade in global and after joining the EAC shows that this markets goes through two East African effect has been limited (figure O.21). After trade corridors: the Northern Corridor a small increase in the first five years, the (Mombasa) and the Central Corridor (Dar EAC’s intra-bloc imports of goods as a share es Salaam). The lack of facilitation at the of GDP fell to a level below initial integra- border, fragmentation of the supply chain, tion 10 years after membership. In contrast, and limited access to affordable air cargo other regional bodies experienced a consid- opportunities also contribute to the high erable increase in intra-bloc trade. After 10 cost of trading. years of regional integration, the Southern African Development Community (SADC) Recommendations saw a tripling of intra-bloc imports, while Meeting Rwanda’s export objectives requires the Association of Southeast Asian Nations a comprehensive trade policy that spans ser- doubled intra-bloc imports to almost 16 per- vices, industry, and agriculture. Analysis cent of GDP. from this report suggests that no one sector Trade connectivit y and high trans- can drive the necessary export and employ- port costs pose a constraint for Rwanda. ment growth on its own. Rwanda should The single most important determinant of look to produce high-quality products for the long-run trade growth, in fact, is the cost of region (especially in agribusiness and food 30 FUTURE DRIVERS OF GROWTH IN RWANDA processing) and to develop other sectors that Monitor the Exchange Rate Closely to are similarly tradable and productive, but less Maintain Export Competitiveness.  Export dependent on location (such as horticulture, drives in other countries have been sus- tourism, professional services, and ICT). tained by maintaining a competitive real The government thus has to build further on exchange rate over a long period. Similar the service sector (the largest current source benefits may be on offer for Rwanda, but of exports), strongly accelerate industrial greater flexibility and close monitoring of growth, and expand into other high-value exchange rates are needed to ensure that agricultural exports (such as horticulture). the real exchange rate remains in line with Six major policy priorities should figure fundamentals and that episodes of over- prominently in a comprehensive reform pro- valuation are avoided, especially in regional gram that uses trade to accelerate and sustain markets where manufactured goods and growth. new products predominate. A first step is to undertake more analytical work on the Harness the Regional Blocs as Platforms link between exchange rates and export for Transformation. The region offers growth,19 particularly as it affects poten- a crucial learning ground for exporting tially dynamic export sectors. Because higher-quality products, especially in man- imports consume capital inflows for for- ufacturing and agroprocessing. Entering eign exchange payments, it is advisable for regional supply chains can help to prepare the government to focus on export growth Rwandan firms to enter the global market. rather than on the trade deficit as a macro- The region can also be used to stimulate economic objective. within-sector productivity growth and to develop other tradable sectors such as tour- Invest in Economic Diplomacy.  The ­complex ism, transport, and professional services issues under consideration in trade negotia- through greater regional scale economies tions require more investment in staff knowl- and greater competition from leading firms. edge and expertise to usefully engage in and A key focus should be on revising and low- undertake negotiations, especially in highly ering the common external tariff within specialized sectors. the EAC to benefit Rwandan producers and exporters that use imported inputs and Improve Trade Connectivity by Lowering poor consumers who disproportionately Transport Costs.  Intensive collaboration consume heavily taxed imports. The inte- along Rwanda’s two trade corridors has grated market can also be extended by pro- already lowered costs and increased exports, moting harmonized standards in goods and but costs can decline even more. Lowering services and by reducing nontariff barriers. regional road tolls and ensuring their uniform For key sectors such as energy and finance, application across all EAC vehicles is one the EAC should develop regional supply avenue. Reviewing tax policy to ensure that chains that can result in economies of scale. truckers from all countries compete on a level Intra-industry regional trade competition playing field is another. Developing Rwanda can force firms to larger scale and drive as a regional logistics hub by attracting pio- out less productive firms. Finally, Rwanda neer foreign firms in logistics would further could advocate for a stronger EAC secre- lower transport costs and strengthen nascent tariat that can review and discuss potential services exports. RwandAir has provided the violations of common market protocols. basis for expanding air connectivity, and its The recently agreed African Continental efforts have reduced the cost of air cargo. Free Trade Area, a pan-African initiative More can be done here, in part by aggressively to liberalize continental trade, can also be pursuing open skies arrangements within the advantageous, once details are penned and EAC and SADC. Rail connectivity also could implementation modalities agreed to. become important eventually; a long-­ standing OVERVIEW 31 ambition to build a railway along the two upgrading and certification). The solid results trade corridors continues to hold promise for in the special economic zone offer a model reducing freight costs. that could be extended to the whole produc- tive sector. Upgrading the product quality Increase Service Sector Productivity.  Lower of domestic firms through a designated sup- policy barriers to services competition and plier development program would offer great stronger services trade within the region potential by enabling domestic firms to sup- would enhance competitiveness across the ply large international firms, which could EAC. Rwanda should look to broaden value facilitate integration within global value added tax exemptions on services exports chains. Such a program also would provide by aligning itself with leading African coun- an opportunity for strengthening regional tries such as Mauritius and South Africa. manufacturing exports. Rwanda would benefit from elevating tour- ism promotion in a separate, high-visibility Faster Urbanization, Greater strategy that seeks to expand leisure tourism Agglomeration beyond gorillas and to convince tourists to spend more time in Rwanda. In the decades Introduction ahead, Rwanda is strategically positioned to Few countries have attained upper-middle- take advantage of exports in mining, educa- income status without substantial urbaniza- tion, and business services. Realizing these tion. Urbanization is the spatial corollary opportunities requires seeking out foreign of structural transformation that involves firms and facilitating near-term services trade the movement of workers from less to more for EAC and SADC professionals, which productive sectors—typically from farm- can be strengthened by extending mutual ing to off-farm sectors in the early stages of recognition agreements beyond architec- development. Urbanization has the potential ture, accounting, and engineering to include, to generate enormous benefits by increas- for example, legal, finance, and consulting ing economic density, which, when man- services. Abolishing limits in work-permit aged well, facilitates the transmission of regimes for all eligible professionals is also knowledge and ideas, increases economies critical and would help to facilitate services of scale and opportunities for specialization, trade for short-term assignments. However, and improves firms’ access to both critical stimulating services exports requires con- services and a large pool of labor with a siderable investment in addressing Rwanda’s wide variety of skills. Cities are also instru- skills deficit. mental in matching skilled people with jobs that value those skills. The presence Attract Private (Foreign and Domestic) of these agglomeration economies means Investment into Tradable Sectors.  More pri- that the more workers and firms are added vate investment is needed in tradable sectors. to an urban location, the higher their indi- Building on its investor promotion activities, vidual productivity becomes. International the government could track firm performance ­ evidence suggests that a 1 percentage point and tailor specific incentives to priority increase in the urban population is associ- sectors. To improve Rwanda’s export compet- ated with a 3–8 percent increase in a coun- itiveness and compensate for relatively high try’s per capita income. transport costs, the government could offer The close association between urban- additional, integrated assistance across min- ization and economic development is seen istries (for example, by linking the Rwanda most vividly in the high-growth economies Development Board’s investment promotion of East Asia. These economies have had with the Rwanda Revenue Authority’s abil- intense spatial concentration of economic ity to exempt import tariffs and the Rwanda activity, typically in locations well con- Standards Board’s support for standards nected to domestic and external markets. 32 FUTURE DRIVERS OF GROWTH IN RWANDA Consider the “flat” development trajec- Rwanda, and urban areas have accounted tories of China, Korea, Thailand, and for 48 percent of national labor productiv- Vietnam in figure O.22, panel a. The flat ity growth over the past 15 years. However, slopes reflect the fact that their urban- urban areas in Rwanda—and Kigali in par- ization has been accompanied by sharp ticular—have not generated the kind of increases in per capita income. However, productivity gains and agglomeration econ- in an unsupportive policy environment, omies that rapidly growing cities in success- urbanization can just as easily be discon- ful East Asian economies have achieved. nected from economic transformation; The pace of rural-to-urban migration also many countries in Sub-Saharan Africa has been relatively muted, 20 which has lim- have urbanized even more rapidly than ited the potential benefits of urbanization. their East Asian counterparts, but with Institutional, regulatory, and infra- minimal or negative growth of GDP per st r uc t u ral refor ms a re needed along capita (figure O.22, panel b). three dimensions—spatial, sectoral, and Rwanda is on a path to rapid urban- i nstitutional—and should be supported ­ ization and needs to manage the process by even faster rural-urban migration and well to harness the urban agglomeration deeper economic specialization. The nature economies that are essential for future high of agglomeration economies, however, dif- growth. The country’s urban population fers by the function of different urban settle- has more than doubled since 2002, and ments. Rwanda’s small towns, secondary Kigali has been one of the fastest-­g rowing cities, and Kigali should perform comple- A frican ­ c ities. T his repor t’s analysis mentary functions, differentiated by the shows that urbanization has accounted for type of scale and agglomeration economy percent of national structural change in 37 ­ they can deliver. FIGURE O.22  Changes in urbanization and income in East Asia and Pacific and in Sub-Saharan Africa, 1985–2010 a. East Asia and Paci c b. Sub-Saharan Africa Korea, Rep. 60 80 Gambia, The Mauritania Malaysia 70 Mongolia Cameroon % of population, urban % of population, urban 60 Guinea-Bissau Fiji Nigeria Congo, Benin 50 Indonesia China Dem. Rep. 40 Togo Thailand 40 Lao PDR Madagascar 30 Vietnam 20 Zimbabwe 10 20 200 2,000 20,000 300 600 1,200 GDP per capita (constant 2005 international $) GDP per capita (constant 2005 international $) Sources: Based on World Development Indicators data (World Bank, various years); Economist 2012. Note: Bottom of arrow = 1985; top of arrow = 2010. OVERVIEW 33 Challenges and Opportunities within 20 kilometers of a secondary city, yet To achieve the rapid economic growth targeted the locational advantages are undetectable until 2050, Rwanda needs to have an efficient more than 5 kilometers from the city center. portfolio of urban locations. With its relatively Half of the rural population lacks access to small population, Rwanda requires one espe- a road network in good condition within a cially strong urban economic powerhouse—of 2-kilometer walking distance. Better rural- the sort that Seoul was for Korea or Tokyo for urban transport links around secondary cities Japan. Kigali has that potential. To fulfill its would improve both their access to inputs and urbanization potential, Rwanda also needs to their impact on surrounding areas. Stronger have a portfolio of complementary secondary rural-urban transport links also would cities and small towns. enhance the benefits of growing urbanization However, although Kigali has seen rapid along Rwanda’s major transport routes, most urbanization and strong urban infrastruc- notably along the Rubavu-Nyabihu-Musanze ture investments, its urban fabric remains corridor, but also along corridors running fragmented by small-scale, patchy land devel- south from Kigali to Burundi and the newly opment. Kigali needs to operate more like developed Kivu shoreline. an effective, integrated labor and product Outside of Kigali, own-source revenue market, which would increase its potential mobilization is low—estimated at 10 percent for realizing agglomeration economies and of district budgets in 2013–14. Districts rely reduce the costs of private inputs and public on central revenues and do not capture many infrastructure. As regards the secondary cit- of the gains from their investments. This ies and small towns, Rwanda should be ready reliance reduces both district resources for to support the emerging economic activities investment and the incentives to identify and in those locations. There is great uncertainty prioritize investments where they are most concerning what kinds of economic activities likely to unlock growth. will settle in which locations. All urban loca- tions are showing similar trends, ­ manifested Recommendations in fragmented spatial development, poor Kigali has a crucial role to play in Rwanda’s transport connectivity, and weak fiscal future development, because “urbaniza- handles. tion” economies—especially those involv- Urban fragmentation in Rwanda is driven ing knowledge spillovers—are generated by institutional and infrastructural con- mainly by large cities. Market forces— straints. Inefficiencies in land use management reflected by the location decisions of people are exacerbated by the ineffective imple- and businesses—have chosen Kigali. Durable mentation of master plans and urban design investments in infrastructure, housing, and documents with targets for densities, building other amenities are needed to ensure that structures, and land uses that do not match the city is productive and livable. However, current market demand. Rwanda essentially Rwanda’s small towns, secondary cities, and has been managing cities by regulating the Kigali should be performing complementary type and intensity of private development by functions, each differentiated by the type of location—epitomized by the zoning of struc- scale and agglomeration economy they can tural characteristics and building uses. Such deliver. These complementary urban locations mismatches, not uncommon in low- and do not have to be huge to generate agglom- m iddle-income countries, are particularly ­ eration benefits. The size of settlements mat- serious in Rwanda, because master plans are ters less than their function: with reasonable updated only irregularly. A lack of local plan- transport costs, towns can be large enough to ning capacity and inconsistent application of facilitate internal scale economies. Medium- regulations exacerbate the problem. size cities are often large enough for “local- Rural and urban connectivity is another ization” economies that come from thick key challenge. A third of Rwanda’s poor live input markets. The implication is that policy 34 FUTURE DRIVERS OF GROWTH IN RWANDA makers should focus on the functions of dif- Prioritize Investments.  Another priority is to ferent types of cities and support agglomera- provide efficient, affordable, and integrated tion though economic density. public transport and to boost investment in As a general principle, policy makers roads. Public transit routes to Kigali’s center should look to deliver a basic standard of ser- are congested and likely to become more so. vices to all people, while letting markets pick To limit sprawl, excellent central public trans- the pace and form of private sector devel- port should be combined with quality pub- opment by location. This principle is exem- lic transport to a small number of strategic plified by Korea, which allowed the dense peripheral locations. Grids should be provided concentration of economic activity in Seoul, (in Kigali and in secondary cities) to ensure while delivering basic services like education, that rapid peripheral development takes place health care, and clean water evenly across the in a planned way. Greater investment in roads population. Investments in human capital are also is necessary to improve the integration especially “safe” bets, because human capi- of Rwanda’s cities with the countryside and tal is a portable asset that can have powerful with neighboring countries and to strengthen effects on people’s welfare and mobility. connections between urban centers. Getting on the path to faster urbaniza- Kigali’s growth needs to be accompanied tion and greater agglomeration will involve by a more calibrated approach toward devel- reshaping regulatory policy, prioritizing oping a complementary set of secondary cit- investments, and strengthening institutions ies and small towns. Potential investments along three dimensions: spatial, sectoral, and in other settlements should be divided into institutional. On spatial reforms, a more bull- those that can be made at low risk before ish view is needed to unleash the economic market demand has emerged versus those potential of Kigali, which market forces have that are better suited after it has emerged. chosen as the main center of production and Here, choices need to be made between commerce. On sectoral reforms to enhance investments in place-specific durable assets the efficiency of capital investment in infra- (such as infrastructure, industrial complexes, structure, housing, and commercial struc- and housing) and people-focused portable tures, there is an urgent need to strengthen assets (such as health, education, and water land markets. On institutional reforms, and sanitation). International experience stronger intergovernmental coordination of shows that such investments should center economic and spatial planning processes is on increasing external connectivity. Stronger needed. connectivity, however, does not guarantee the greater development of secondary cities Reshape Regulatory Policy.  The main and other towns versus Kigali. Connectivity priority is to strengthen land markets so and specialization may well entail greater that private developers have the appropri- concentration of activities in Kigali. ate incentives to increase density. Rwanda The government has pursued a policy of should explore moving from the quantity- grouped villages (imidugudu). The program based regulation of land use, epitomized provides rural-urban links by preparing by highly prescriptive zoning requirements future urban dwellers for urban life while for structures, to price-based allocation. they are in rural areas, and aims to preserve Land prices, which reflect the demand for agricultural land. Improvement in the plan- and scarcity of locations, should become ning and establishment of settlements is the basis for allocating private investments needed to ensure that they serve the intended across space and for allowing structures to purpose while minimizing huge infrastruc- serve the evolving economy. Regulations on ture costs and potential future financial structures should be used to mitigate nega- losses. Prioritization of rural-urban connec- tive externalities like environmental degra- tivity and better anticipation of migration dation and structural safety. to larger urban areas are needed to address OVERVIEW 35 underlying concerns. This effort can be private and public firms—that responds complemented with “off-grid” rural infra- with agility to emerging domestic, regional, structure (for example, maintenance of rural and global opportunities is essential for roads and bridges) that delivers key services future growth. As Rwanda’s economy while placing smaller “bets” on the long-run develops and matures, the need for the pri- vocation of the location. vate sector to play a leading role in achiev- ing the rapid growth required to reach Strengthen Institutions.  Faster urbanization Rwanda’s ambitious income aspirations and greater agglomeration require stronger only increases. Private enterprises create institutions. Urban planning capabilities at jobs and generate income, drive economic the city and district levels need to be con- transformation, compete in global export siderably stronger. Plans should respond to markets, and, ultimately, drive aggre- markets and community needs, while safe- gate productivity growth and innovation. guarding against capture by special interests Moreover, the private sector has to provide through strong public oversight and engage- much of the huge investment needed to sup- ment. Further, broad institutional and gov- port future growth ambitions. ernance reforms such as clarification of land Rwanda needs to strengthen the com- and property rights set the foundations for petitiveness of the private sector as it under- urbanization and urban development. takes necessary infrastructural investments. Rationalization of planning activities To support the development of viable enter- is needed to foster institutional coordina- prises, the government has continued the tion. To accomplish this, economic planners strong track record of reforms initiated should start to think spatially, and spatial after the genocide against the Tutsi, as evi- planners should become more aligned with denced, for example, in Rwanda’s rapidly economic planning and goals. improved ranking in the Ease of Doing Further, economically connected districts Business Index, which now need to be fol- have to be encouraged and required to coor- lowed through with the reform measures dinate land use plans, transport and service described below. provision, major infrastructure like special The state has an equally important, but economic zones, tourism infrastructure, and complementary, role to play in correcting so on to exploit complementarities. market failures and defining its role in pri- Finally, stronger institutions are needed to vate investment—by implementing well- value land, to disseminate land values pub- targeted public investments, strengthening licly across uses, and to assign and protect bureaucratic capacity, withdrawing gradu- property rights. Rwanda has a strong basis ally from productive activity while enhancing for efficient and transparent valuation, with its regulatory and facilitation functions, and centralized and digitized landownership and developing capable and accountable market transaction records, a professional valuation institutions. Public investments will remain body, and credible institutions for oversight. important for several years to come, given Credible land valuation would enable urban the vast infrastructural and social needs of areas to fiscalize public investments in land the country; that said, with growing financ- through land value capture. ing needs under the National Strategy for Transformation and tightening limits on public borrowing, the relative share of pub- Competitiveness and Enterprise lic investment will decline over time as the Development for Innovation-Led private sector share increases. SOEs will also Growth remain crucial for several years to come, Introduction because the private sector needs time to build. Emergence of a vibrant, competitive, and The reform agenda to boost the competi- innovation-driven enterprise sector—both tiveness and innovativeness of the enterprise 36 FUTURE DRIVERS OF GROWTH IN RWANDA FIGURE O.23  Share of firms in Rwanda, by firm stages of development. The contrast is espe- size, 2011 and 2014 cially stark when compared with the relative price trajectories of the Asian high-growth 80 economies whose long-term performance 70 Rwanda aspires to surpass. It was only when 60 these economies reached income per capita of more than US$5,000 (2010 U.S. dollars, Share of rms (%) 50 purchasing power parity) that the ratio of 40 their price levels to those of the United States 30 exceeded Rwanda’s current ratio. 20 Low returns (real and perceived) also con- tribute to the slow uptake in private sector 10 activity. Rwanda’s labor productivity (output 0 per worker) is low by international standards, 1 2–4 5–9 10–19 20–99 100+ Firm size (number of employees) explained by negative or weak growth in within-sector labor productivity across most 2011 2014 sectors. Moreover, Rwanda’s TFP levels (out- Sources: Calculations based on 2011 and 2014 Rwanda Census of put generated by a given quantity of labor Business Establishments data (NISR 2011, 2015). and capital) are low for its income, and the rate of TFP growth has slowed significantly sector is comprehensive and demanding, in recent years, further widening the gap with reflecting Rwanda’s strong ambitions for other countries. future growth. W hat explains Rwanda’s weak T FP p erformance? A country’s TFP has two ­ Challenges and Opportunities key determinants. The first is the alloca- The enterprise sector in Rwanda, in its tive efficiency of its resources (land, labor, current form, remains relatively small, young, ­ c apital)—that is, the extent to which these ­ and concentrated in the nontradable sector. public and private resources get channeled Private sector firms are small (figure O.23); to their most productive use. The second is they lack the scale economies critical for the pace of technological innovation in the competitiveness and have limited export pres- ­ e conomy—that is, the pace at which the ­ ence. Moreover, as in other low-income coun- frontiers of technology and good business tries, informality is prevalent. practices expand. The significance of tech- The limited presence of formal enter- nological innovation will gather pace as the prises reflects high cross-cutting costs, lower Rwandan economy moves toward middle- productivity than what is needed to sustain income status and beyond, becoming an rapid economic growth, and low capacity for increasingly pressing subject of reform for innovation. future growth. Price levels and thus input costs are high Resource misallocation refers to ineffi- in Rwanda, which constrains the competi- cient enterprises commanding more resources tiveness of its enterprises. Low- and middle- (land, labor, capital) than warranted by their income economies tend to have lower price productivity levels. Analysis of Rwanda’s levels than high-income economies because of manufacturing sector suggests that TFP in the lower costs of nontradable goods and ser- Rwanda’s manufacturing sector could be dou- vices (the prices of tradable goods tend to be bled if resource misallocations were reduced similar across all countries). This divergence drastically (figure O.24). The scope for in prices tends to close as countries’ income improving productivity through this channel levels rise. Rwanda’s relative prices have fol- is likely even larger in other sectors.21 lowed such patterns, but at more elevated lev- Some of the underlying causes for mis- els compared with other economies at similar allocation are straightforward, rooted in OVERVIEW 37 FIGURE O.24  Resource misallocation in formal be strongly positioned on innovation capac- manufacturing in Rwanda and select countries ity. Currently, private enterprises do not serve as strong demanders of innovation. On top Kenya of that, managerial capabilities remain low, which undermines firms’ capacity and incen- Rwanda tives for upgrading technology and operating Ghana practices. Innovation is also hampered by the scarcity of links with foreign firms and Ethiopia export markets and by limited FDI in trad- India able sectors. The supply side of Rwanda’s innovation system is only starting to emerge. Côte d’Ivoire China Recommendations Rwanda’s demanding reform agenda to boost 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 the competitiveness and innovativeness of the Measure of misallocation enterprise sector reflects the government’s Source: Calculations based on NISR 2017. great ambitions for growth. Key areas include Note: Resource misallocation is measured by the dispersion the following. of marginal products of inputs across firms. Large dispersions suggest that frictions in input and output markets prevent the movement of productive resources across firms and that Reduce Business Costs by Tackling Cross- inefficient firms command more resources than warranted by their productivity. Cutting Constraints. Rwanda has made substantial reforms to improve the business environment and support firms. The first the way in which both the state and mar- imperative is to continue to improve afford- kets allocate resources. Decisions on public able access to finance. Over time, capital investment—accounting for more than half markets and nonbank financial institutions of total investment in the economy—need need to be developed. There also is consid- to be guided by clear analysis of economic erable potential for tapping into foreign returns. Rwanda has made good progress sources of funding, which would require in this regard, for example, in developing a actions at the regional level to harmonize robust public investment management sys- regulations and reduce barriers to services tem. Moreover, the government’s focus in its trade and investment. Next, to reduce the industrial policy needs to shift toward differ- cost and increase the reliability of electric- entiating firms and sectors by performance ity, Rwanda needs to forecast and manage (past or potential). domestic supply and demand of energy, Rwanda is in the early stages of building build capacity to procure and implement its innovation capacity, which is the ability power-purchasing agreements, and bet- to introduce new products, processes, ideas, ter integrate system planning and system technologies, and solutions. It needs to con- operations functions in the utility. Efforts tinue strengthening these capabilities for to reduce logistics and broadband costs are productivity-​ ­ led growth to meet its long-term also important for the competitiveness of income ­ ambitions. Although structural trans- enterprises in Rwanda. formation and improved allocation of resources can stimulate labor productivity growth for Improve Effectiveness of the Government’s another decade or so, sustaining it over a l ­onger Tax Incentives and Other Industrial Policy period will only be possible through the diffu- Interventions.  Rwanda has already estab- sion of innovation and technology. lished some of the key preconditions for an Innovation capacity of Rwandan firms has effective industrial policy. However, incen- been on an upward trend, but several chal- tives need to be linked more clearly to the lenges need to be addressed for Rwanda to productivity and export performance of 38 FUTURE DRIVERS OF GROWTH IN RWANDA beneficiary firms. Direct support should be competitive environment would encourage focused on maximizing foreign exchange firms to seek out the best available knowl- earnings (or savings) and targeted to edge and strengthen managerial capabilities strategic sectors well placed to generate to introduce new processes and technologies, exports, economic growth, and job cre- integrate them in the production system, allo- ation. Crucially, a strongly monitored cate skilled staff to use them, and make them ­ p erformance-based approach (focused on financially viable. Improvements in man- firm productivity and exports) should be agement practices can be achieved through mainstreamed in all interventions. various training and coaching services, Rwanda’s industrial incentives need to be improvements in graduate-level management better coordinated across government agen- courses, and efforts to encourage increased cies. Incentives also could do a better job of interaction between multinational firms and attracting FDI in tradable activities. local suppliers. Stronger coordination, moni- toring, and evaluation of funding programs Define the Future Role of SOEs and for science, technology, and innovation are Further Strengthen Their Corporate also needed. The agenda on the supply side of ­Gover­n ance.  SOEs played an important innovation is discussed in chapter 1. role in the early stages of Rwanda’s economic development and will continue to do so in the Transitioning Agriculture and Food to medium term. On the basis of sectoral assess- Be a Longer-Term Engine of Growth ment of the level of competition, competitive- ness of SOEs versus private firms, economic Introduction development goals, and social considerations, Agriculture has been a major source of a useful starting point would be to divide key national income and growth for Rwanda. It sectors into four groups: (1) sectors in which accounts for close to 70 percent of employ- SOEs will retain a monopoly; (2) sectors in ment, more than 30 percent of GDP, and which SOEs will compete with private firms; more than 50 percent of exports of goods. (3) sectors from which SOEs will withdraw Agricultural value added has risen more than when efforts to build up private sector capacity 5 percent a year over the past 15 years, which prove successful; and (4) sectors from which is a high rate of growth by global standards; SOEs will withdraw immediately because the and productivity in the sector has increased private sector is already capable and there strongly. Further, growth in agriculture has is no compelling social rationale for them. likely stimulated growth in other sectors Public-private boundaries can shift as the pri- through backward links (for example, by vate sector gains strength. Strong ­ government encouraging input industries such as fertil- support will still be needed, but its role will izers) and forward links (for example, by increasingly be to facilitate private investment increasing food processing). Widespread and build strong market institutions that sig- growth in the purchasing power of farm nal priority sectors. Enterprise development households in remote areas has also helped in Rwanda must somehow resolve the some- to mobilize unemployed local resources times-conflicting goals of alleviating market by increasing demand for local goods and failures and encouraging private sector devel- services. opment. The reluctance of private investors to Considerable government effort has been invest enough in public goods such as infra- devoted to developing the sector, especially structure is one market failure. Another may after the food price shocks of 2007– 08. be low investment capacity among Rwanda’s Major government efforts have included private sector. development of new irrigated land, large- scale land consolidation, and land regis- Build an Effective National Innovation tration. The development of cooperatives System.  On the demand side, a strong has been a major component of state-led OVERVIEW 39 collective action, although there is scope for implementation of those private sector deci- much more. Promotion of the use of fertil- sions. Like any rapidly growing economy, izers and improved seeds and effective inter- Rwanda needs to evaluate shifting patterns ventions in livestock production have also of demand in regional and global markets, contributed to growth in agriculture. discover its core advantages, and then assess With this strong start, the main question how they can best be deployed to specialize now is how long and to what extent agricul- in food and other agricultural products that ture will remain an engine of growth in the will maximize income gains. Rwandan economy. Does Rwanda’s highly Rapid increases in productivity also ambitious economic future continue to have require more mechanization, higher use of agriculture at its core, or will the sector inorganic fertilizer and improved seeds, and be useful mostly to launch high long-term improved access to financing. Despite sub- growth and then gradually take a back seat? stantial progress in land consolidation, most This report contends that the agriculture of Rwandan agriculture is carried out under sector will remain a major source of com- conditions of abundant labor on small plots, parative advantage for Rwanda, even as the mostly on hillsides. The use of labor-saving country climbs the income ladder over the machinery, such as tractors and combine coming decades. harvesters, is confined to a few small niches. However, mechanical solutions are needed Challenges and Opportunities to expand bench terraces and extend irriga- Periods of rapid growth in the past have tion at lower costs per unit, in both cases largely reflected either the expansion of agri- involving whole communities. Mechanical cultural land or the increased use of inputs solutions also are needed for postharvest (figure O.25). However, there is diminishing functions such as transport, processing, marginal scope for further expansion of cul- tivated land. There is significant potential for FIGURE O.25  Decomposition of sources of agricultural growth continuing to improve farmer skills, extend in Rwanda, 1961–2014 irrigated area, stabilize and expand terraces, boost the use of more adapted fertilizers, 6 5.55 4.01 5.15 and increase farmers’ use of better seeds. 5.04 5 Programs targeting these improvements Average annual net agricultural could boost agricultural growth over the next 4 output growth (%) decade or so. Maintaining rapid growth over 3 1.84 a longer period, however, requires greater 2 emphasis on TFP growth through more effi- cient allocation of resources and greater reli- 1 0.05 ance on technological innovation. 0 For stronger productivity growth, the sec- tor has to continue to modernize, become –1 more responsive to market signals, and –2 integrate more effectively with regional and 1961–70 1971–80 1981–90 1991–2000 2001–10 2005–14 global markets. Its contribution needs to TFP Area expansion Inputs intensification shift from supplying commodities primarily for domestic use to producing higher-value- Source: Compiled from U.S. Department of Agriculture 2017 data. Notes: The three sources of growth listed sum to output growth in the period in question. added goods as an integral part of food supply Output growth may be different than column height because of negative contributions to chains linked to regional and international growth in the period in question. Growth not explained by area expansion or increased use per hectare of inputs (including labor) is attributed to total factor productivity (TFP). TFP is markets. This effort requires an institutional, a combination of increased allocative and technical efficiency and technological change. infrastructural, and policy environment led Because the numerator of TFP (output growth) is highly affected by weather outcomes in any given year, it makes sense to consider TFP outcomes over at least a 10-year period by the market, with a commensurate gradual that includes both good and less good weather. This explains the strategy for handling shift in the public role to facilitating the fair differences between the early and later parts of the period 2001–14. 40 FUTURE DRIVERS OF GROWTH IN RWANDA and packaging. The declining use of inor- organic fruits and vegetables including jams ganic fertilizer also needs to be reversed, by and frozen dinners, packaged perishable ani- continuing to expand the coverage of loca- mal products, cut flowers, and gourmet teas tions and to improve the formulation of and coffees of specific geographic origins. fertilizers. The government is already mod- Even under current conditions, Rwanda’s ernizing its seeds regulations and is also tak- comparative advantage in these items rela- ing steps to legalize agricultural genetically tive to its neighbors is strong by conventional modified organisms. Finally, limited agricul- measures. tural finance remains a major constraint: the use of formal financial services in the agri- Recommendations culture sector is quite low. In the medium term, Rwanda will have an Environmental concerns arising from agriculture sector that is increasing in pro- global climate change and land degrada- ductivity and adapting to the future. State-led tion are a particular challenge that needs efforts to increase agricultural productivity to be managed proactively for improving and maximize the sector’s potential in Rwanda agricultural prospects in Rwanda. Rwanda remain relevant in the medium term. These has experienced a 1.4°C mean tempera- efforts involve extending the approach to con- ture increase since 1970 and is on track to solidation of production decisions and inten- experience another 1°C to 2.5°C increase sification of staple food crops. Public support over the next three decades. Higher tem- should continue to improve the efficiency of peratures have led to the spread of pests and small farms that are still not using fertilizer in diseases, impairing the health of livestock appreciable amounts, lack access to adequate and humans, lowering crop yields, harming agricultural water, are situated on unprotected food security, and decreasing export earn- hillside slopes, or use inferior seeds, so that ings. Rainfall patterns, already highly vari- such farms can achieve the technical efficiency able in Rwanda, have become even more of Rwanda’s better farmers. variable, with projections of a 20 percent Higher agricultural growth in the longer increase in variability by the 2050s. In the run can only be achieved by reaping the ben- east and parts of the south, this limits the efits of scale economies and specialization availability of water and feed for livestock through trade and the production of higher- and increases the vulnerability to diseases. value-added goods. Such efforts require At the same time, heavier rains, particu- a rapid response to market signals, ready larly in the north and west of the country, access to investment resources, technical increased floods and landslides, resulting expertise, and ability to organize production in crop losses, health risks, and damage to and provide appropriate incentives for work- infrastructure. Moreover, the combination ers, led by the private sector. The state needs of rain-fed, small-scale agriculture, high to continue playing a leading role as umpire, rainfall levels, and steep hillsides (where generator of public knowledge, provider of most of Rwanda’s agriculture is practiced) public goods such as infrastructure and basic leads to very high rates of soil erosion. research, and responder to other market fail- Rwanda can harness its comparative ures. Targeted high-return initiatives should advantage in high-value crops and livestock receive public financial support, accompa- products benefitting from a hillside envi- nied by a rigorous evaluation to determine ronment combined with extensive biomass, whether adequate returns are being achieved. intensive inputs of skilled labor, the ability to Public sector activities in agriculture will brand credibly (as in organic or Fair Trade), increasingly be targeted more effectively to pro- and the ability to support higher transport viding key public goods in seven key areas. costs to final markets. Potential products include branded mountain cheeses, essen- Adapt Rwanda’s Research and Regulatory tial oils, potato chips, baby food, certified Institutions to Evolving Opportunities and OVERVIEW 41 Threats.  A key element of Rwanda’s com- integrity of food security. Regional integra- parative advantage is the credibility of its cer- tion also should be pursued through continu- tifications, including ISO 22000 ­ certification ing efforts to adopt science-based standards, for food safety and Fair Trade standards product registrations, and certification of under the Rwanda Standards Board. Organic agricultural inputs. certification also may become advanta- geous. The high technical expertise of the Profit from the Big-Data Revolution in Rwanda Agriculture Board will be increas- Innovation, and Make the Benefits of Big ingly important as improving standards and Data Accessible at Reasonable Cost to Rwanda’s efforts to expand exports increase Smallholders.  This effort is critical both the frequency and importance of sanitary and to increasing innovation and private sector phytosanitary issues. Rwanda’s reputation for investment and to dealing with the smallest probity and accountability is one of its most farms and most densely settled rural areas precious assets and is especially important in in Africa. “Smart farming,” where just the agriculture, where quality and food safety right amounts of the right inputs are used issues are dominant concerns of consumers. for each parcel in response to information gathered by handheld devices with the right Improve the Effectiveness of Policies on sensors, offers one such opportunity. Big- Vertical Coordination. Improved policies data approaches such as blockchain technol- can be achieved by expanding participa- ogy could offer the potential for lowering tion in cooperatives and encouraging private the costs of small financial transactions that sector aggregators. More effective vertical require secure record keeping and decen- coordination in agriculture would be where tralized input, such as land registration and private sector partners provide skills, capi- mortgages. tal, and entrée into international markets and where farmers acquire higher incomes Link Public Investments in Infrastructure and new resources. Government can improve More Effectively to Agricultural Development general operating conditions for aggregators and Higher-Value-Added Products.  Irrigation and develop a knowledge platform regarding is clearly a constraint, especially in marsh- which forms of industrial organization work lands and in the drier eastern regions of the best for addressing specific industrial organi- country. High-value export crops (such as zation problems. The platform could provide horticulture for export) would likely cover the reliable data on vertical coordination, finance, cost levels much more easily if cost-effective prices, costs, and weather; this information is supply chains were in place that could realize critical to reducing uncertainties and lowering international prices. risks for private investors and should encour- age competition. Further Develop High-Level Human Capital Formation in Agriculture.  In particular, to Engage with Neighboring Countries on a achieve vertical integration, a more consis- Regional Division of Labor. A regional tent approach is needed to training managers division of labor would include both and technical experts working for aggrega- production based on comparative advantage ­ tors. Companies could be involved in this and knowledge generation and diffusion. effort through training programs to build up Rwanda has a major stake in increasing the nationally needed skill sets in agribusiness, importation of raw materials such as cere- high-value supply chains, and agricultural processing and animal pro- als for its food-­ technology. The best multinational com- tein industries, while increasing its exports panies have a track record of making these of processed foods and high-value calories, investments and provide examples of how for example, from milk and meat products. investments in human capital can be done to Ways should be explored to guarantee the mutual advantage. 42 FUTURE DRIVERS OF GROWTH IN RWANDA Address Land Degradation and Global Climate hold all government officials accountable for Change More Comprehensively. Although performance through the system of perfor- considerable progress has been made in mance contracts (imihigo); established the constructing robust “bench” (wide) ter- Joint Action Development Forum, a partici- races, much more needs to be done to secure patory planning mechanism to improve the Rwanda’s land asset. Fortunately, the soil and alignment of citizens’ and districts’ priorities; water management interventions c ­entral to and created an annual forum for national halting land degradation also would increase dialogue (Umushyikirano) to allow all citi- the ability of farmers to adapt to climate zens to have direct access to the most senior change through better water retention and leadership in government. improved soil quality. Landscape restora- These efforts have proved effective, well tion and conservation are a community-level reflected in Rwanda’s international rank- activity, not an individual one. Local govern- ings, with particularly strong performance ment, producer groups, and national techni- on indicators of government effectiveness, cal expertise and funding all have a role to control of corruption, rule of law, and reg- play in implementation. The development and ulatory quality (figure O.26). Reflecting use of climate-smart and big-data agricultural the government’s high-profile anticorrup- technologies can further help farmers to cope tion efforts, Rwanda was ranked 48 (out of with the challenges of climate change. 180 countries) for control of corruption on Transparency International’s Corruption Perceptions Index in 2018, marking a vast Capable and Accountable Institutions improvement over its 2006 ranking of 121. Introduction Emerging from very difficult initial condi- Challenges and Opportunities tions after the 1994 genocide against the Rwanda’s strong overall governance has been Tutsi, Rwanda’s leadership faced an enor- a driving force behind its rapid growth and mous challenge not only of rebuilding a dev- astated economy but also, more broadly, of FIGURE O.26  Benchmarking of Rwanda along the various dimensions of governance constructing a national identity and renewed sense of national purpose. Reestablishing peace and social stability and building the Control of decimated social capital of trust were viewed corruption as the underlying sociopolitical challenges Rule of law of governance (see Jones and Murray 2018). The government’s response was decisive in Regulatory quality several forms, establishing security and seek- ing to channel social energies toward the Government national purpose of raising incomes, improv- effectiveness ing opportunities, and providing health and Political stability education to all citizens. Along the way, the government created Voice and new homegrown solutions and programs to accountability create an integrated Rwandan community, 0 20 40 60 80 including revitalizing the community work Percentile rank, 2016 program to bring people together around a Mean of UMICs Mean of LICs common community purpose (“Umuganda”) Mean of LMICs Rwanda once a month; reestablished the traditional community courts (Gacaca) and created Source: 2016 Worldwide Governance Indicators from Kaufmann, Kraay, and Mastruzzi 2010. mediation committees (abunzi) to achieve Note: LIC = low-income country; LMIC = lower-middle-income reconciliation and mete out justice; sought to country; UMIC = upper-middle-income country. OVERVIEW 43 provides a key comparative advantage over specialization of justice sector employees, most peers in the region. But the require- including judges, prosecutors, and inves- ments of a middle-income Rwanda will be tigators; and improving case management different—more demanding—than those techniques would enhance the judiciary’s that sufficed in the low-income period. effectiveness in enforcing contracts. Further Building effective institutions is a long-term improvements in the efficiency of the land endeavor. The improvements are necessarily management system and provision of more incremental, building on global and local les- resources to implement the law on intellec- sons and factoring in the specific context of tual property would strengthen property the country. rights. Reviewing the performance of fiscal To strengthen institutional effectiveness incentives with a view to reducing expan- requires greater social capital of trust— sion in Rwanda’s tax expenditures, increas- between citizens, between civil society ing local government revenue collection, and government, and even within national ensuring that the state captures an appro- political leadership. In Rwanda, interper- priate share of the expected rise in mineral sonal trust was understandably very low in revenues, and taking further steps to raise the immediate aftermath of the genocide Rwanda’s strong public financial manage- against the Tutsi. Impressive progress has ment to international standards would been made since then on achieving reconcili- strengthen the state’s financial capacity. ation, promoting economic and social devel- A final set of governance challenges has to opment, and strengthening the structures of do with accountability mechanisms between governance. But more work is needed in this the government and citizens. Rwanda has in regard, given the strong positive relationship place homegrown initiatives, which aid in between trust and long-term development. creating demand for accountability by citi- Key challenges also relate to limited inno- zens through making them shareholders of vation for public civil servants and local development. governments. Imihigo has made a strong contribution to instilling a culture of results. Recommendations Building a more complex, richer society Strong growth over the next decades will requires an approach where civil servants, depend on specific institutional requirements, local officials, and civil society can serve as a including a market system that encourages source of innovation. It also requires the gov- entrepreneurs to take more risks in search of ernment to obtain and act on feedback from higher rewards by protecting private prop- citizens. Essentially, public institutions need erty and minimizing policy uncertainty. to become more innovative, better coordi- Strong growth also requires enhancing nated, and more adaptive. state effectiveness through three core insti- To achieve continued, rapid growth, an tutional pillars: (1) enabling innovative, effective market-based economic system is coordinated, capable bureaucracy and local needed to encourage private sector develop- governments; (2) using efficient market sig- ment, matched by financial resources of the nals to enable strong cooperation between the state. Despite Rwanda’s impressive improve- state and the business sector and maintaining ments in governance, private sector invest- fiscal prudence; and (3) strengthening public ment and the entry of new firms remain administration accountability. All three com- low, reflecting gaps in market institutions. ponents are essential for an effective state Creating special courts and fast-track pro- (figure O.27), which, in turn, is necessary for cedures to adjudicate small claims; further sustained high growth. promoting alternative means of resolving commercial disputes (such as arbitration, Pillar 1: Enable Innovative, Coordinated, mediation, and conciliation); boosting reli- Capable Bureaucracy and Local ance on technology; increasing training and Governments.  To achieve strong growth 44 FUTURE DRIVERS OF GROWTH IN RWANDA FIGURE O.27  A framework for assessing Pillar 2: Strengthen Market Institutions and effectiveness of state institutions in Rwanda Fiscal Prudence.  The evidence is compelling that functioning markets require well-defined State rules of the game, enforced transparently and effectiveness predictably. Advanced economies (almost as a rule) have a system of highly evolved eco- nomic institutions that convey prices, define Societal trust property rights, enforce contracts and com- petition policies, and close informational gaps Well-structured between buyers and sellers (Commission on Strong market State and innovative institutions accountability Growth and Development 2008). As part government of its long-term development, Rwanda has to develop these key market institutions (for competition, contract enforcement, and prop- over the next decades, well-structured, capa- erty rights), backed by strong financial capac- ble, and empowered civil service and local ity of the state. governments are needed, with the resources Establishing the Rwanda Inspectorate and and other incentives to be innovative (even Competition Authority and extending its entrepreneurial). Such innovation entails the mandate to monitor the impact of SOEs on incentives and resources to inform decision competition, promoting the principle of com- makers and challenge them with evidence and petitive neutrality to ensure equal treatment analysis when needed; to share information of all investors, and removing regulatory and coordinate actions within and outside the barriers to entry and rivalry in input sectors administration; and to take informed risks, would improve the competition framework. experiment, scale up successes, and learn Creating special courts and fast-track proce- from failures. Creating such institutions will dures to adjudicate small claims, promoting strengthen capacity and coordination within alternative means of resolving commercial the government and make progress on decen- disputes (such as arbitration, mediation, and tralization to encourage local initiative and conciliation); boosting reliance on technol- eliminate overlaps in responsibilities. ogy; increasing training and specialization Modifying the imihigo to adopt multiyear of judges, and improving case management targets with annual benchmarks (rather than techniques would enhance the effectiveness focusing only on short-term goals), making of the judiciary system for contract enforce- greater use of qualitative surveys, and placing ment. Further improvements in the efficiency a stronger focus on outcomes rather than pro- of the land management system, better public cesses could enhance innovation. Increasing information on market values of all catego- the importance of the joint imihigo and a ries of land, and provision of more resources strong delivery unit to coordinate policies on to implement the 2008 law on intellectual key cross-cutting issues would improve inter- property would strengthen property rights. agency coordination. Further increases in Increasing local government revenue col- training by the Rwanda Management Institute lection, ensuring that the state captures an should be supported by skills audits and func- appropriate share of the expected rise in tional reviews to identify the missing skills mineral revenues, and taking further steps to in the public sector. Regular compensation strengthen Rwanda’s public financial man- reviews, higher compensation for individu- agement will be crucial. A better balance has als with scarce skills, and the development of to be found between public investments that nonfinancial incentives could become increas- are expected to generate high returns over the ingly important to retain and attract highly long term versus investments in areas with skilled staff as competition for scarce skills potentially high short-term returns based on increases from private companies. market signals of scarcity. OVERVIEW 45 Pillar 3: Enhance the State’s Accountability and the free withdrawal from foreign to Citizens.  For institutions to remain legiti- exchange accounts in commercial banks mate, the state has to be “citizen-centered,” (Ggombe and Newfarmer 2017). supported by an effective feedback loop 3. This report considers the period 1995–2005 as the recovery period and the subsequent between civil society and local governments phase as the postrecovery period. and service providers. The capacity and moti- 4. This stagnation mostly reflects a decline vation of citizens to participate with state in private savings, as government savings actors in assessing service delivery and find- increased. The savings-investment gap has ing solutions are critical for Rwanda’s emer- been made up by external assistance and, gence as a strong, successful middle-income increasingly, by FDI inflows. economy. 5. Although future investment does not have to Reform measures can seek to strengthen be financed through domestic savings if the checks and balances further to improve country has ready access to external financ- accountability over the executive, local offi- ing, running large external imbalances over cials, and service providers. Strengthening long periods has proved unsustainable for countries. key watchdog agencies (the Public Accounts 6. Rwanda’s high costs stem from the small Committee, the Office of the Auditor market size, long distance to external mar- General, the Office of the Ombudsman, kets (by virtue of being landlocked), shallow and the Rwanda Governance Board) could and costly credit markets, high cost of energy improve government accountability. Greater generation, and scarcity of land that increases involvement of citizens in local decision mak- the rent on it. ing (for example, in setting imihigo objectives) 7. For example, Lendle and Olarreaga (2017) and reliance on more qualitative information find that the impact of distance on cross- in monitoring performance would strengthen border trade flows—across 61 countries and support for local government and improve the 40 product categories—is about 65 percent quality of services. smaller for eBay transactions relative to total international trade. More generally, Osnago and Tan (2016) find that a 10 percent increase in an exporter’s rate of Internet adoption leads Notes to a 1.9 percent increase in bilateral exports. 1. Worldwide, almost 80 percent of income 8. Initial signs are encouraging. FabLab, an growth of the poor is due to increases in innovation hub at the government-backed countries’ income levels (Dollar and Kraay ICT park, has started to work with three-­ 2016). Rwanda, too, has witnessed the close dimensional printers (BBC 2016). association between growth and general 9. Rwanda’s priorities in this regard are already improvements in welfare along several dimen- well reflected, for instance, in the soon-to- sions of welfare in the past two decades, as roll-out 4G LTE broadband network—a chronicled in this report. wireless broadband technology designed 2. Key l ibera l i zat ion measu res i ncluded to support roaming Internet access via c ­ ell (1) elimination of most price controls; phones and handheld devices. (2) liberalization of exchange rates in 10. Three drone ports, which will allow the 1995; (3) lowering of tariff rates from 35 to drone network to send supplies to 44 percent 18 ­p ercent; (4) liberalization of the mon- of the country, are expected to be completed etary and financial sectors, including adop- by 2020. tion of new currency exchange regulations, 11. These countries are Argentina, Brazil, China, creation of private commercial banks, and India, Indonesia, Korea, Mexico, the Russian privatization of state-owned banks; (5) lib- Federation, Saudi Arabia, South Africa, eralization of current account operations and Turkey. Korea is counted in this group (imports, exports, services); (6) elimination because it was not yet a high-income country or easing of certain restrictions on capital in 1990, the base year for the comparison. flows, including the transfer of capital and 12. For example, Chinese domestic companies revenues related to foreign direct investment have captured larger market shares and moved 46 FUTURE DRIVERS OF GROWTH IN RWANDA up the value chain in highly competitive manu- 20. Only 14 percent of Rwanda’s urban popula- facturing industries, such as high-end chemi- tion were recent migrants from rural areas cals, electronics (in particular, information in 2014, while only 20 percent of recent inter- technology), automotive, and aircraft. nal migrants moved from rural to urban areas 13. Robotics, automation, computerized manu- (NISR 2015). facturing, and artificial intelligence could 21. Efficiency of resource allocation across sec- reduce the advantages of production in low- tors can be just as important as allocation labor-cost emerging economies, discouraging within sectors. However, the available data offshoring from and favoring reshoring to do not permit a comparison of the magnitude these countries. of misallocation of resources across sectors in 14. Purchases of real estate properties by Chinese Rwanda and in other countries. individuals in high-income countries also contributed to the boom in FDI outflows. Outflows from Korea have also increased, References driven by rising greenfield investments. Akamatsu, K. 1962. “A Historical Pattern of 15. In 2015, the top 10 investors (by FDI stock) Economic Growth in Developing Countries.” in Africa were the United States, United Journal of Developing Economies 1 (s1): 3–25. Kingdom, France, China, South Africa, Italy, Bashir, S., M. Lockheed, E. Ninan, and J.- P. Tan. India, Singapore, Switzerland, and Malaysia. 2018. Facing Forward: Schooling for Learning 16. High dependency imposes costs at the house- in Sub-Saharan Africa. 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More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. A strong and widely acknowledged record of economic success—including a three-and-a- half-fold increase in per capita income since 1994—places Rwanda among the world’s fastest-growing economies. Traumatic memories of the 1994 genocide are gradually fading, as associations begin to take a more positive form—of a nation on the rise, powered by human resilience, a sense of common purpose, and a purposeful government. Past successes and a sense of frailty have fueled aspirations for a secure, prosperous, and modern future. Sustaining high rates of economic growth is at the heart of these ambitions. Recent formulations of the nation’s Vision 2050 set a target of achieving upper-middle- income status by 2035 and high-income status by 2050. Future Drivers of Growth in Rwanda: Innovation, Integration, Agglomeration, and Competition, a joint undertaking by experts from Rwanda and the World Bank Group, evaluates the country’s possibilities and options in this endeavor. The report identifies four essential drivers of growth—innovation, integration, agglomeration, and competition—and reforms in six priority areas: human capital development, export dynamism and regional integration, well-managed urbanization, competitive domestic enterprises, agricultural modernization, and capable and accountable public institutions. Government of Rwanda SKU 33227