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The persistent challenges of development in Rwanda

18 April 2019
Pritish Behuria
This article appeared in a special edition of The East African for #Kwibuka25 in commemoration of 25 years since the Rwandan genocide.
This year marks 25 years of Rwandan Patriotic Front (RPF) rule since the 1994 genocide. Over that time, President Paul Kagame and his government have led the government through a remarkable period of economic recovery, alongside impressive increases in social standards. For a densely populated country, at a geographical disadvantage of being land-locked and located far from coasts, to achieve such successes has been a remarkable feat. Yet, despite progress in Rwanda, the country continues to face external and internal pressures that may pose a threat to sustaining the miracle of the country’s recovery.
Rwanda’s economic growth success has been driven by the country’s services sectors and public investments, funded by foreign aid. There has been some degree of export diversification in the country away from coffee (the country’s predominant historical export). However, the export basket has largely diversified to other primary commodities (particularly, minerals). The rapid growth of tourism receipts has also been vital for managing the country’s large trade deficit.  Driven by the desire to make Kigali into a hub of various kinds – from tourism to finance – there has been a construction boom, which has contributed to the expansion of the business tourism (Meetings, Incentives, Conferences and Events – MICE) and FIRE (Finance, Insurance and Real Estate) sectors. The transformation of the city of Kigali is evident, although critics argue that this ‘visible’ growth has not been redistributed equally to the majority, rural segments of the population. Within VISION 2020, the manufacturing sector has also been neglected, contributing to Rwanda’s ‘developmental state’ strategy being quite different from successful East Asian latecomers like Korea and Taiwan.
In 2014-15, Rwanda suffered a severe foreign exchange crunch, because of fluctuations in global commodity prices, prompting the government to refocus its attention on reviving growth in its manufacturing sector. A Domestic Market Recapturing Strategy was published and the government embarked on attempts to bring key ‘demonstration effect’ investors, like C&H Garments, Positivo and Volkswagen, to the country, hoping it would contribute to an influx of manufacturing sector investments.
Despite some success in driving Rwanda’s services-based strategy and making some progress in encouraging manufacturing (particularly the agro-processing sector), the sustainability of the growth of these sectors remains vulnerable. Though business tourism – through heavy investments in the Kigali Convention Centre and Rwandair – has increased, there has been limited attention to supporting domestic linkages (with manufacturing and agriculture) that accompany increased demand for domestically produced goods. Investments in real estate in Kigali resulted in speculative investments in the hotel industry, with unhappy results for many. Skills, too, have lagged in relation to the speed of developments in the service sector, with the full potential of employment benefits far from realised. The reactive strategy to reviving manufacturing sector growth coincided with economic nationalist sentiments across East Africa. Rwanda – as the only East African country to retain a ban against used clothes – has had to suffer short-term challenges after AGOA (African Growth and Opportunity Act) access was lost. Domestically-based companies were not yet in place to compete with imported clothes and secure the domestic market, and have led to foreign investors having to rethink their future strategies.
Rwanda’s services-based strategy was initially justified on the grounds of geographical considerations and what the government saw as its future competitive advantages. For East Asian countries or early Western developers, the challenge of creating employment was less complex compared to the challenges facing late developers today under 21st century globalisation. Both late developing countries and early developers are forced to contend with recent global economic changes, but have to do so by contending with very different domestic political economies. For late developers in Africa and South Asia, where the majority of the population is under 40 years of age, this challenge is often more acute, given governments have less finances to redistribute spending to the population.
Challenges appeared in Rwanda’s attempt at ‘leapfrogging’, as surveys showed higher-than-expected unemployment and underemployment. In 2012, as part of the Economic Development and Poverty Reduction Strategy 2 (EDPRS 2), the government recognised that there had been difficulties in creating employment for its young, educated population. The EDPRS 2 included a job target of creating 1 million jobs (200,000 jobs annually) over a period of five years. In the National Strategy for Transformation 1 (NST 1), these targets were scaled up to creating 1.5 million jobs between 2017 and 2024 (214,000 jobs annually). Through the Workforce Development Authority (WDA) and other agencies, a number of programmes like the National Employment programme have been rolled out. Yet the challenge of creating decent jobs for the population persists, as government statistics recently showed, with 30 percent of the population categorised as underemployed.
Rwanda’s attempts at creating employment, reviving manufacturing sector growth and its broader development strategy, rely on strengthening of the East African Community (EAC). The EAC, which President Kagame currently chairs, is perceived to be central to creating a larger market for goods manufactured within Rwanda. The strategy of regional industrial policy harks backs to the 1960s, when similar attempts were made in East Africa. However, in the 1970s, the old East African Common Market contributed to enhancing Kenya as the region’s industrial centre. Eventually, tensions between members contributed to the collapse of the Common Market in 1977. For Rwanda, with a very small domestic market, hopes of encouraging manufacturing sector growth are perceived to depend on regional industrial policy through the strengthening of the EAC. However, as in the 1970s, tensions between members have highlighted challenges to sustaining possibilities for a strengthened regional community. In recent months, it is the two landlocked countries – Uganda and Rwanda – whose future may depend most on a strong EAC, that have been the source of the greatest tension within the region.
Rwanda’s tension with its neighbours – not restricted to Uganda – obstruct the future economic potential of the country. Yet, political tensions within the country are as important. For successful latecomers, strong reciprocal relationships between the government and business actors have been central to sustaining transformation. For all governments, private business actors are both a source of anxiety and opportunity. Private financiers can fund opposition movements, but they can also provide a source of financial support to the presiding government. In East Asia, Korea and Taiwan dealt with the challenge of managing state–business relationships differently. Korea organised its private business community into family-owned conglomerates (known as the chaebol) that retained a close relationship with the state. Later, these companies grew into global diversified business groups, which became household names (Samsung, Hyundai). In Taiwan, the state took a leading role in investing the economy, but developed close linkages with private small- and medium-sized enterprises, which collectively grew in importance. In both countries, foreign investments were attracted strategically, with the focus of ensuring there was a transfer of technology to domestic companies. In Rwanda, state-, party- and military-owned firms have made important contributions to strategic investments in the country, as have foreign investors. Yet there is less evidence of the creation of a domestic capitalist class, which operates as lead actors in strategic sectors. There is also little evidence of transfer of technology and expertise from foreign investment. Political frictions among elite sections of society have also led to some key businesspeople leaving the country and becoming a source of threat within and outside the country. As the Rwandan government aims to progress in its economic diversification, it will need to broaden the pool of firms it relies on and ensure the benefits of foreign investment are transferred to domestic companies.
The RPF government’s achievements over the last 25 years are remarkable. However, the challenges of sustaining structural transformation under 21st century globalisation remain. Successfully catching up requires the constant negotiation of pressures from within the country, domestic elite groups and traversing the challenges of the global economy. As the RPF evolves beyond its 25-year rule, questions remain about how political and economic considerations will inform its economic trajectory.
 
Dr Pritish Behuria is a Hallsworth Research Fellow in Political Economy at The University of Manchester’s Global Development Institute. He is a researcher on the ESID project on the political economy determinants of economic growth.
His two recent articles have been published Open Access:
Behuria, P. (2019). ‘Twenty‐first century industrial policy in a small developing country: The challenges of reviving manufacturing in Rwanda‘, Development and Change, 0-30.
Behuria, P. and Goodfellow, T. (2018). ‘Leapfrogging manufacturing? Rwanda’s attempt to build a services-led “developmental state”‘, European Journal of Development Research, 1-23.