A shift to manufacturing is practicable

Aiming high has been the hallmark of post-genocide Rwanda’s development agenda over the past two decades and the result has been an average annual growth of above 7 percent—the highest in the region. Last week, finance minister Claver Gatete revealed that the country intends to allocate Rwf 170.3 billion (about 10 percent) of the total budget for 2014/2015 fiscal year to productivity and youth employment thematic area, whose goal is to shift the economy from peasant-based farming to industry and services. But is this ambition possible? The answer is yes. But another question is: how? A 2009 situation analysis of the Agriculture sector conducted by the Institute of Policy Analysis and Research (IPAR) noted that the Rwandan economy is, and will remain for the foreseeable future, heavily dependent on the agricultural sector employing around 90 percent of the population, providing 91 percent of the food consumed in the country, contributing 36 percent of GDP and accounting for 70 percents of revenue from exports. Even after five years since IPAR’s analysis, figures for Agriculture’s contribution might have slightly reduced but they are still up there as far as provision of food, employment and exports are concerned with its GDP contribution swinging above 30 percent. It’s therefore very hard to see how the Government can possibly replace such a critical sector with industries and services in the short or medium run. But while it’s understandably hard and will certainly take decades to achieve, it’s not impossible. Besides, there’s very good reason why Rwanda should pursue that course of action. Agriculture can’t be solely relied on for Rwanda’s future growth given the country’s rapid population growth and resultant pressure on the limited arable land resources; these, coupled with the vulnerability of the sector to natural factors such as weather changes, price fluctuation and subsistence production necessitate a new economic model based on more dependable and predictable sectors such as services and industries. The Rwanda Environmental Management Authority notes that the main threat to agricultural productivity is the country’s high population density on the limited land resource which has led to land fragmentation and reduction of farm sizes. “High population density has fuelled a shortage of arable land and decreasing farm size resulting in the adoption of intensive agricultural practices on land with declining soil fertility. As a result of land shortage, even the most fragile areas (such as wetlands) are not spared,” says REMA in a report. Indeed, with a total land area of 26,336 km2, Rwanda’s total arable land is about 1.4 million hectares or 52 percent of the total surface area of the country but because of land pressure, a 2008 government study found that actual area cultivated has exceeded 1.6 million hectares in recent years with another 0.47 million hectares under permanent pasture making well over 70 percent of the country’s total land surface under some kind of agricultural activity. From an environmental conservation perspective, further encroachment on protected land resources such as forests and wetlands for agricultural purposes poses adverse climate change consequences. Naturally, the more the population grows the less space for agriculture as farms are replaced by families; such a scenario would require a new strategy to create not only employment but produce food. For instance, between 1990 and 2002, the area covered by banana plantations dropped from 26 to 23 percent with only Kibuye District registering some increase in banana production. A 2008 study by the government found that landholdings were very small with more than 60 percent of Rwandan households cultivating on less than 0.7 ha, 50 per cent cultivating less than 0.5 ha, and more than 25 per cent cultivating less than 0.2 ha of land. Experts again attribute this trend of small sized farms to high population pressure on a small land area which is accentuated by cultural and inheritance patterns of dividing land among sons. From farms to firms To circumvent the inevitable limited land resource, it’s a prudent decision that the government is taking to chart a way forward when there’s still time. China, the most populous country on earth is facing a similar problem and is already adopting novel measures to address its land crisis while ensuring sustainable agricultural production. By the end of 2011, over 50 percent of the country’s 1.35billion people was living in urban areas compared to just 13 percent in 1950. Now experts predict Chinese urban population will be over 60 percent by 2030. The Chinese approach is to develop countryside cities, encouraging local governments to promote local investment and investing in small factories to create employment for small-holder farmers who’re adopting urban lifestyles and seeking employment in factories. Meanwhile, real agricultural production has been left in the hands of large-scale commercial producers with a corporate mindset; these are supported to increase productivity on the relieved land spaces to provide sustainable food supplies to feed the huge urban population. Rwanda is most likely to adopt such a model because with a large population, you can’t rely on farmers operating on small chunks of land to sustainably produce food and cash crops for a hungry market. Minister Gatete says he intends to allocate Rwf 252.8 billion (14 percent) of the total resource envelop for 2014/15 for rural development. If this includes promoting urbanization, hence expanding demand for urban-based services, then it’s a rational move. The good thing about an increasing population is that it widens the market base for services and demand for manufactured goods hence giving manufacturing industry strong impetus to surge. Also, countryside urban centres reduce the rate of rural-urban migration which reduces pressure on service provision in bigger cities such as Kigali. However, if this strategy manages to create space for agriculture, government will need to allocate land to commercial farming groups such as organized farmer cooperatives willing to invest in agriculture to provide more sustainable production for export, agro-based industries and domestic consumption. Meanwhile, employment creation will even become a more important government priority in coming years as a result of urbanisation. Without farms, Rwandans will need to seek jobs from firms to earn an income to buy food and pay for other services such as electricity, water and education. The current plan under Hanga-Umurimo and others aimed at creating 200, 000 off-farm jobs per year are very commendable but they seem to lack proper evaluation. For instance, there’s no clear statistics to indicate how many jobs were actually created last year through such initiatives. Based on the available evidence of agriculture’s current important position in the country’s economic growth, it’s safe to say that while Rwanda can indeed reduce the over-dependency on the sector, it’s impossible for a total substitution of the sector. What can be achieved however is a reduced contribution of agriculture to GDP while maximizing that of industries and services which seems to be the prevalent trend. For instance in 2001, the contribution of the agricultural sector to GDP was about 46 percent in real terms; however, this had reduced to 43 percent in 2003 and 36.4 percent by 2006-meanwhile, the service sector’s contribution had surged to 43 percent. That’s the desirable trend. More reforms needed However, to spur more growth in the industrial and service sectors more reforms will be needed. The current growth rates in both sectors are not ideal for government to achieve its ambition. For instance, Gatete says that he expects the manufacturing sector to expand by 6 percent which is lower than the 11 percent achieved in 2013. Meanwhile, the Services sector is expected to recover from 4 percent in 2013 to 7 percent in 2014 as government spends big again. Many observers say the government has put in place a favourable environment for businesses to prosper as corroborated by various international reports such as the World Bank’s Doing Business rankings, problems with electricity generation are cutting back on the benefits of those impressive reforms. Political stability, low regulatory red-tape, controlled inflation, good road infrastructure and low levels of corruption are all good attractions for both domestic and foreign investment. However, power supply remains a challenge. Fortunately, the Minister of Finance is confident that the electricity and gas sub-sector will see much stronger growth of 18 percent which is double the 9 percent growth achieved in 2013. That should be sustained.