I have always said that economics is really about human development and meeting the diverse aspirations of citizens. Unfortunately economic policy can indeed end up being an academic exercise, but ultimately, the numbers need to be reduced to tangibility. If we concur on that, it therefore means that what is imperative for any government is the actual social impact of its economic policies on the ground.
Rwanda’s National Institute of Statistics (NISR), recently announced economic growth for 2022 at 8.2%, which is an impressive achievement given the constraints that world economies have experienced in the recent past. According to the NISR, the sources of this growth were services, which grew by 47 per cent, agriculture by 25 per cent and industry, which grew by 20 per cent.
A further drill down shows that in the services sector, hotel and restaurant services increased by 87 per cent, transportation activities increased by 22 percent, technology and communication services by 20 per cent, education by 17 per cent, and tourism and retail by 14 per cent.
In the industrial sector, output rose due to a 15% increase in mining and quarrying and an 11% increase in manufacturing output. On the contrary, the agriculture sector growth decreased by 1 percent, apparently due to poor production performance across all seasons for the lack of inputs and unfavourable weather conditions in the year.
GDP growth basically indicates the direction in which an economy is moving and positive growth means that there is more economic activity that is going on and the economy is creating more value. The question always becomes at what cost and for whom? This is normally determined by the structure of the economy.
Where, for example, the ownership of the means of production in the key growth sectors of the economy is concentrated and therefore not broad, GDP growth can result in a deterioration in the distribution of wealth and incomes as the rich get richer and consequently, inherent structural wealth and income inequalities can further increase and thereby fail in addressing existing socio economic deficits.
There can also be jobless growth, where economic growth does not necessarily lead to new employment or income opportunities. This typically occurs where companies are not fully utilising their capacity and can therefore increase production without the need to increase employment or further investment. On the contrary, where ownership is broad, GDP growth benefits more citizens, creates new employment and income opportunities and can therefore, begin to address inherent structural income inequalities.
It is therefore always important and prudent to fully analyse and understand not only the sources of GDP growth and their socio economic impacts, but also the cost of that growth. In short, GDP growth must be understood in relation to other socio economic indicators while we must also determine how much it is costing the nation to achieve such growth. Such costs are both tangible and intangible.
Having said the above, it is no surprise that the services sector remains the main driver of growth in Rwanda, especially the hotel and restaurant sectors given Rwanda’s aggressive and rather effective marketing of its tourism and conferencing activities (MICE). Whether this growth created new employment opportunities or not is not clear. What we don’t want, as mentioned above, is jobless growth where incomes and wealth become more concentrated thus further exacerbating income inequalities. Inclusive growth is the key objective here.
In my opinion, it is a positive development that Rwanda’s economy is more of a services economy because if you look at developed economies, it is their services sectors which dominate. For example, in Singapore, the manufacturing sector (25.26 percent in 2021) and services (69.45 percent in 2021) sectors are the key growth drivers, and this is almost similar in Taiwan where services contribute 62 percent and industry 35 percent. So clearly, the services sector creates the most wealth in developed economies followed by industry. For Rwanda, the GDP split is agriculture at 24.06 percent, industry at 20.34 percent and services 47.76 percent. Rwanda is therefore on the right trajectory in becoming a services based and developed knowledge economy of the future per vision 2050.
The realities on the ground are that a majority of Rwandan citizens are in the agricultural sector and any growth in that sector is critical in impacting the quality of life of the majority of citizens, especially when it comes to food security issues. However, if we take the number of people involved agriculture (70% of population and 72% of working population) and its contribution to GDP, we can see that agriculture is currently a low value creation sector because 72 percent of the working population is contributing to only 24 percent of the national economic cake. That has to change.
We therefore definitely want to see a move away from primary production activities towards agro-processing and value addition in order to achieve higher incomes and increase in the skills levels of that sector. From what I can see, there are many players and initiatives which seek to modernise and increase productivity in the agriculture sector, but these efforts, which are commendable, need to be better coordinated so that there is a more holistic approach and there are no duplications of effort which can result in inefficiencies and misallocation of scarce resources. Added to this, we must be careful that we do not inadvertently create an "agricultural poverty vicious cycle” in which the majority are trapped and continue a subsistence survival year after year.
The industrial sector will need to play a more dominant role as we seek to industrialise the economy, process most goods locally and increase the export of finished goods. The industrialisation multiplier effect creates sustainable growth in other sectors of the economy while its employment opportunities can indeed lift many out of poverty. A buoyant industrial sector is typically fed by primary products on the input side, while it creates more value on the output side. Its backward and forward linkages to the rest of the economy are substantial. It also has increasing marginal returns, meaning that the more you produce the cheaper and therefore more profitable the extra units produced become, which is not the case with primary production in the agriculture and mining sectors. We have to modernise and industrialise aggressively more so that, as much as possible, we manufacture what we consume and export more manufactured products. An industrial revolution should therefore be at the centre of transformation.
In the long term, Rwanda needs to fundamentally restructure its GDP and rely less on primary products for export earnings which can arrest the economy’s potential while it also externalises potential internal wealth, local job and income generation opportunities. Fortunately the National Strategy for Transformation (NST) is very clear on that. As President Kagame reiterated recently, we know the "What” and the secret is in effective implementation.
Vince Musewe is an economist at Resource Africa Limited, Kigali. Contact him on vtmusewe@gmail.com