Growing out of poverty

Despite a decade of strong economic growth, Rwanda remains among the poorest countries in Africa. According to the UN’s Human Development Index, the living standards of the average Rwandan are below that of Sub-Saharan Africa as a whole. To meet the government’s ambitious plans for poverty reduction, per capita income need to grow by an average of at least 12% per year between now and 2020. For this to happen, the economy as a whole needs to grow at around 8% per year or more. The question is: where is this growth going to come from?Between 1985 and 1995, nine countries managed to maintain per capita growth above 5% including two from Africa: Botswana and Mauritius. These success cases demonstrate that sustained rates of high growth are possible, if policy-makers understand the determinants of long-run growth and how the policies they enact can affect it, both positively and negatively. Fortunately, since the late 1980s much of the attention of economists has been focused on precisely these issues. A huge number of empirical studies have been produced in recent years that have greatly improved our understanding of the main determinants of growth. Across these studies, seven factors consistently emerge as being critical issues for policy-makers to get right: peace and political stability, macroeconomic stability, high investment in education and health, major investment in infrastructure, openness to international trade (particularly export promotion), good governance, and the development of sound financial institutions and markets. The good news for Rwanda is that on many of these general factors the country has been ranked very highly. Analysts looking specifically at Rwanda have been able to identify a number of factors that seem to be particularly important to the country’s growth prospects. For example, increase in investment is associated with higher productivity and growth. By increasing the rate at which new technologies can be adopted, improvements in education and skills-human capital, in the jargon, also promote growth. Finally, well-targeted aid that is aligned with development objectives (and not, say, focused solely on humanitarian assistance) can have a positive effect on growth. As the domestic investment in Rwanda is far below the required levels to achieve the 2020 objectives, foreign direct investment (FDI) is central as a supplement to national efforts to achieving a high growth in Rwanda, since FDI is considered as a key ingredient for successful economic growth in developing countries. In the context of Rwanda where capital is not raised locally, FDI can add the local capital stock and increase the country’s output or productivity through a more efficient use of existing resources or by absorbing unemployed resources. Important to Rwanda’s goal of poverty alleviation through economic growth is to attract the flow of FDI into agriculture: the agricultural sector plays an important role in the economy and has the potential to advance the country objectives of growth and poverty reduction since over 85% of the population live in rural areas and agriculture is the mainstay of their living, any strategies to address poverty must involve and improve agricultural productivity and farm incomes. Going forward, the big challenge for Rwanda is likely to be inequality. Economic growth is a prerequisite for poverty reduction. But, poverty reduction does not automatically follow from greater economic growth. In order to achieve both economic growth and poverty reduction targets, the government of Rwanda needs to look at how the wider population can enjoy gains from growth and how these gains can provide the basis for sustained growth in the future. This double objective supposes a strong consistency among different policies. The government’s Economic Development and Poverty Reduction Strategy provides the basis for this consistency. The priorities it lays out in tackling poverty through improved food security and targeted schemes of job creation and social protection, increasing economic growth by investing in infrastructure, modernizing agriculture and promoting skills development, reducing population growth through family planning and education outreach programmes, improving the quality of health care and schooling-are consistent with what we know about the determinants of economic growth. The key issue is to ensure that they are being implemented and co-ordinated effectively. In the long-run, Rwanda must grow its way out of poverty. To do so, policy-makers need to understand the role that policy can play in making that growth possible, and ensuring that the fruits of that growth can be shared by all. Ends