Rwanda reforms | Deloitte UK has been saved
Limited functionality available
Before the global financial crisis there was a growing belief that the world had entered a period of stable, strong growth. Good policymaking, so the argument ran, had a played a central role. In 2003 the Nobel prize winning economist, Robert Lucas, famously declared – "the central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades."
Today such statements smack of hubris. The financial crisis has knocked the standing of policymakers and diminished confidence in their ability to deliver growth.
Indeed, pessimism about the ability of policymakers and governments to improve growth rates has probably overshot.
But rather than rehearsing the things that have gone right for Western policymakers in the last five years we turn instead to Africa, indeed, to one of its smaller countries.
Rwanda shot to global prominence 20 years ago with an ethnic conflict and genocide in which almost one tenth of its population died. In recent years Rwanda has acquired a very different reputation, of remarkable economic reform which has generated enviably fast growth.
After shrinking by half during the conflict of 1993 and 1994, Rwanda's economy has grown fivefold over the last twenty years, at an average rate of 9% per year. GDP per person, a proxy for national wealth and prosperity, has more than tripled.
Rwanda has modernised quickly, with agriculture shrinking and growing reliance on services, which now account for about half of output. Exports have been strong with particularly good growth in high value-added goods, such as milling and construction products.
Rwanda's success can be attributed to three factors. First, it has worked hard to curb corruption. In a recent World Bank survey, 87% of Rwandan businesses rated their court system as fair, impartial and uncorrupted, almost double the average reading in sub-Saharan Africa. According to Transparency International's Corruption Perceptions Index, Rwanda is less corrupt than major emerging economies India and China or the developed European economies of Greece and Italy.
Rwanda's second strength is the implementation of free-market reforms. Over the last three years the government has improved corporate access to credit, made it easier for businesses to pay taxes and get electricity and cut red tape. The government has made an ambitious push to develop the nation's ICT infrastructure. Land purchases, passport applications, building permits and birth certificates can all be dealt with on-line. According to the World Bank's latest Doing Business Report, Rwanda ranks above all African nations except South Africa and Mauritius in ease of doing business.
Finally, in a region that has seen much turmoil, Rwanda is politically stable. Its controversial President Paul Kagame, is a tough leader whose army ended the genocide in 1994. His rule has consolidated the power of his party, whose leaders own a large chunk of Rwanda's private businesses. However, President Kagame has also provided a friendly and stable environment for businesses to operate in and has inspired confidence in foreign investors.
Challenges remain. Skills shortages are rife, the power and transport infrastructure is patchy and a significant proportion of the population lives below the poverty line. But even in these areas there has been progress. Rwanda has opened up its labour market to immigrants and started attracting back emigres from the West. It is also investing heavily in public health and education. Infant mortality rates have fallen sharply and literacy rates among the young have risen from 48% in 2000 to 84% in 2011. The fraction of people living below the poverty line has shrunk from 60% to 45% during that period.
Rwanda lacks the natural resources that have been such a source of wealth and growth in other African economies such as Nigeria and Angola. Paradoxically, this has its advantages. Rwanda cannot fall back on resources for growth and its policymakers have worked hard to improve the environment for business. This has created a more dynamic, diverse free market economy than is seen in some resources-rich developing nations.
Deloitte's Social Progress Index reinforces this message. It shows that countries that do not depend on resources as their primary source of income tend to perform better on social and environmental indicators than their resource-rich counterparts. Rwanda ranks more highly on the Social Progress Index on health, personal freedom and choice than other countries with similar per-capita GDP.
Rwanda's economic reforms have achieved remarkable success in a deep damaged society. It stands as a model of post-war reconstruction and reconciliation – and offers a counter to Western pessimism about the ability of governments to shift the dial on growth.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.